"The 90402" - Part 7 (Canyon Country)

Address: 338 E Rustic Rd - 90402 (Canyon)

Details: Teardown (2 bed/1 bath) on a 6,000 sq ft lot. The picture on the left is an artist rendering of what could be done. The picture on the right is what you would actually be getting.

Description: California bungalow renovate or build new ray kappe, aia designed architectural, concrete, steel & glass. Existing bungalow & guest house with fireplace & hardwood floors immersed in speckled light and ocean breezes. This particular canyon location provides all the canyon has to offer including immediate proximity to the creek, mature sycamore trees plus the wonderful rustic canyon feeling. Located blocks from the beach this is an opportunity to live in a wonderful compound or develop dream home

Previous Purchase: 3/31/06 - $1,600,000

Listing History: 8/23/07 - $1,795,000

Here we have another loser (when including holding and selling costs, not to mention potential price cuts). And of course it is another speculator/investor fleeing the falling market. They put up a cute artist rendering to advertise the listing but the description doesn't say anything about plans or permits being included.

Two posts ago, we featured another failing flip RIGHT ACROSS THE STREET (333 E Rustic). 333 was at least in better shape and was on a lot that was 2,000 sq ft bigger...and it was asking $140,000 less than this one. So of course, that leads us to believe that this one won't sell without a big price cut. Are we missing something here or are these people just hoping for a sucker to bite?

The sellers appear to be tied to Hollywood and also have a history of being a part of "a little cult of people who know architecture". There are multiple articles on this owner's appreciation for architecture and design on the web. The LA times did an article two and a half years ago on a bunch of people who had professional photographers come to take pictures of their completely restored and decorated homes and these people were in it. Just think back to the vanity of early 2005...Hollywood types dabbling in house flipping, record prices, volume, etc. Now here we are and projects are getting abandoned before they start. Neighbors are competing to see who can price lower, not higher.

Times have changed. Hopefully 2008 brings us back to reality...who knows, we might even see people cut prices before sitting on the market for over 4 months (128 days on this one).

"The 90402" - Part 1 **Update 1**

Address: 416 17th - 90402

This attempted flip was recently featured as the first house in our "the 90402" series.

Well, we already have an update...this place is also for rent, for a massive $9,000/month. Remember, it is currently for sale at $2.55M

That is a lot of money for a 3 bed/2 bath...it is freshly redone but still...here are some other 90402 options for you thrifty readers.

608 11th - 3 bed/1.75 bath - $6,300/month
448 14th - 3 bed/2 bath - $5,600/month

Of course there are a couple additional rental options in 90402 which are more than $9,000/month but they have more beds/baths and are much bigger (this one is barely over 2,000 sq ft). If you are going to shell out over $100K in rent per year, you should try to get more than a 3/2 house in my opinion...and of course, you have to EARN roughly $200K to get that $100K since you don't get any tax subsidies when you are a lowly renter (boo hoo).

"The 90402" - Part 6 (Canyon Country)

Address: 333 East Rustic Road - 90402

Details: 2 bed/1 bath, 1,029 sq ft house on an 8,000 sq ft lot...flip quality

Description: Capture the timeless charm and romantic history of santa monica canyon in this tastefully redone 2bd/1ba pied-de-terre, artist retreat, steps to will rogers beach and fine dining. Indoor/outdoor flow: sun deck; outdoor patio; office; french doors; lush landscaping; wood floors; security system and much more. Move-in ready. Seller has approved plans for 800sf addition. Great creative vibe.

Previous Purchase: 7/26/06 - $1,500,000

Listing History: 10/10/07 - $1,659,000

Base Holding Costs + Commission: $162,000 + $83,000 = $245,000

We have previously featured losses from the southern tip of Santa Monica as well as one northern canyon house which had a notice of default filed against it. This post and possibly a few more will focus on additional canyon area homes in "the 90402" which are showing distress.

Here we have either a failing flip or a case of someone getting cold feet and not going through with a true remodel ("seller has plans for addition"). It seems likely that this holder spent a decent amount of money on plans and permits and/or getting the house into freshly flipped condition ("tastefully redone"). So add these costs to the base holding costs, transaction costs, and other costs (insurance, trash, water, sewer, etc etc) and it appears to be a loss even after taking into account any tax benefit and rental equivalent value (assuming anyone was living here).

Speculation was/is everywhere in Santa Monica during the bubble. This post just adds to our geographic diversity of coverage and highlights the "plans and permits" trend that a lot of listings have been coming with lately. I think the real problem with this place is that it is trying to get a premium price for something which should be a complete tear down (a 2/1 with barely over 1,000 sq ft is tear down quality no matter how many cute details you have put into it).

Is someone really going to pay over $1.6M for a tiny shack which they will then have to spend hundreds of thousands of dollars more to add square footage?? I guess the real question is; what is lot value in this area and should this place sell for anything over lot value?

"The 90402" - Part 5

Photo #1 is 239 14th -- Photo #2 is 611 14th

Some updates for now...then we are going into the canyon to find some more failing flippers.

We have been following house #1 for a long time as it is a new spec house that cut its price from $4.5M to $4.0M, entered escrow, fell out of escrow, and is apparently now in escrow again for $3.74M(and possibly closed). You can find the last update this blog did here.

House #2 was also featured on this blog a while back. It quickly cut its price from from $2.2M to $2.05M and apparently went into escrow for $2.0M.

Below is a summary of this info and some additional info from a contributer (thank you). If anyone knows anything else about any of these sales please feel free to provide some extra info.

Address-----List Price-------Sale Price
611 14th St.........2.198.........2.0.............-9%
242 25th St........2.5.............2.330.........-7%
713 22nd St .......3.995........3.4..............-15%
239 14th St........4.495.........3.742.........-17%


Also of potential interest (although not 90402)

1046 26th St......1.329.........1.138.........-14%
1018 Yale St.......1.375.........1.375.........***
1147 Centinela....1.595........1.475.........-8%

I am by far most surprised by the spec house selling for significantly less than $4 million. Also note that 713 22nd was a newly build house towards the peak of the last real estate bubble and was a very nice house. Kids had grown up and looks like another downsizing situation. Previously mentioned here.

Again, if anyone has more info or if any brave real estate agents want to step up and help out, all additional info is appreciated.

"The 90402" - Part 4

Address: 222 7th #208 - 90402

Details: 1 bed/1 bath condo, 759 sq ft, $340/month HOA (yikes)

Description: Impressive looking building in a great location! One bedroom - one bath condo with an open air courtyard which adds to it's charm. A well maintained unit in a quiet secure setting. Building has earthquake insurance, gym, sauna, security building & parking with extra storage. If you enjoy the outdoors/beach/palisades park, this is the unit for you!

Previous Purchase: 6/6/05 - $545,000

Listing History: 6/18/07 - $599,000
Reduced: 07/14/07 - to $589,000
Reduced: 09/05/07 - to $569,000
Reduced: 11/13/07 - to $529,000

Ok, so in case you were feeling too low class after looking at the last 90403 post, we are back to "the 90402". I know this is not a house, but it is being featured here for a reason. Take a look at the date it was bought and the date that it was first put up for sale. Now think about the tax rules involved with selling real estate. Yes, these people listed almost exactly 2 years after their initial purchase.

I think the Manhattan Beach Confidential blog calls this something like the "two year itch". I believe it is significant. As we see more and more units coming on market right around 2 years after their previous purchase, it shows that there were many "stealth speculators" in the market who just wanted to make a quick buck and who may not have been able to hold on for the long term. These "stealth speculators" are going to add to the inventory because they never intended to be long time owners and will be competing with other folks who are trying to sell (flippers, short sales, REOs, and long time owners). So far, the "two year itch" in Santa Monica has been most commonly seen in 1 or 2 bedroom condos. Keep your eyes open for this.

Lastly, from looking through zillow, it seems like units similar to this one in this building peaked in mid/late 2005 for around $550K or slightly higher, so this person bought almost at the exact peak. The mid 2004 value looks to be in the very high $400K levels. So since this unit hasn't sold and has been on the market for 6 months, it obviously needs a price cut and its value ultimately may already in 2004 territory. Yup, its a rollback.

Also, there are many higher end condo units on Ocean Ave that we may eventually get to (in case you are interested), but for now, one that was previously featured can be found here.

A Newly Minted "Insider" Learns About Market Cycles

Address: 937 5th #10 - 90403

Details: 2 bed/1.5 bath condo, 833 sq ft, $226/month HOA

Description: Excellent location, great value for 2 beds/1.75 baths top floor unit. Light and bright, no shared walls. Smooth ceilings, recessed lighting. Kitchen has granite counter tops. Bathrooms have marble counters. Steps from montana avenue; restaurants, specialty shops, banks, bakeries and the pavillion's market. Near 3rd street promenade.

Previous Purchase: 10/17/05 - $637,000 (90% financed)

Listing History: 11/7/07 - $599,000

Real Estate License Issued To Owner: 9/18/07 - This is a conditional salesperson license and owner has 18 months to complete educational requirement.

We are taking a quick break from our "the 90402" series to bring you this interesting situation. 90402 coverage will resume shortly.

When we saw OC Renter's recent post about many real estate agents receiving NODs (notice of default) in Carlsbad, we remembered all the "insiders" who are also taking losses and fleeing their "investments" here in Santa Monica.

Today we have another case of an "insider", but this time, our "insider" is freshly minted. The owner of this condo just got her conditional real estate license 3 months ago. Since she is willing to price her condo in what looks to be mid 2005 range, it appears that she isn't too delusional (or maybe she just hasn't had enough time to drink the typical real estate agent kool-aid yet). We congratulate you for pricing at a level in which you will lose your entire 10% down payment of $63,700 (including selling commission).

Now it seems pretty convenient that the current price is almost exactly enough to wipe out the full down payment. The question is, will this end up as an attempted short sale with a price cut or two or does this person have their loan balance paid down and/or have money to bring to the closing table?

"The 90402" - Part 3

Address: 324 Euclid - 90402

Details: Built in 2003, 5 bed/4.5 bath, 4,400 sq ft house on a 7,500 sq ft lot

Description: Beautiful custom 2-story mediterranean on quiet, coveted, tree-lined st. Designer quality finishes. Distressed hardwood flrs, vaulted beam ceilings, wet bar, lg open spaces, surround sound, gourmet kitchen, lg family rm, dining rm overlooking patio w/spa, downstairs library, guest rm. 4 bedrms up w/ lg play areas and wonderful master suite overlooking grassy backyard. Outdoor fireplace and patio. Beautifully landscaped w/new sprinkler system.

Previous Purchase: 4/14/06 - $3,895,000

Listing History: 12/1/07 - $4,250,000

With estimated holding costs (interest/opp cost + taxes) of around $500K and then another $200K in selling costs, this looks like a potential loss even after accounting for interest deductions and rental value during the past 20 months.

From the pictures, this looks like a pretty nice place and it was recently built (2003). However, it seems like it might be hard to get an asking price of $4.25M for something that is "used" and on a small lot (7,500 sq ft). For example, 239 14th was a recently featured new spec house here which had to cut its price all the way down to $4.0M and then entered escrow for less (update to come later). So it seems hard to justify a premium for this place...we will watch for the first price cut.

"The 90402" - Part 2

Address: 534 20th - 90402

Details: 2,400 sq ft house, 3 bed/2 bath on a 8,900 sq ft lot...another flip

Description: Cleverly updated. Wonderful beachy feeling in this English Country-style home in coveted Gillette's Regent Square on lg lot. Spacious LR w/hwd flrs & FP. New kitchen opens to recently expanded fam rm & breakfast area. French drs open to sunny bkyd, new pool, spa & stone landscaping. Step-down master suite w/lg bath opens to bkyd. 2 add'l lg BDs w/Jack & Jill bath. Newer roof, elec & plumbing. Crown moldings, security system & many wonderful details inside & out. Move right in!

Previous Purchase: 12/13/06 - $2,626,000

Listing History: listed maybe a month ago or so? - $2,895,000

Holding Costs + Taxes + Agent Commission: $170 k + $29K + $145K = $344K

Here we have another flipper/speculator who is likely going to be taking a loss. I didn't even include all the extra fees, costs, etc of holding this place and dealing with it for a year. It says it has a new kitchen and it is "cleverly updated". So did they spend any money on this upgrading? If they did (we think they spent at least some), then it is going to be adding entirely to the loss.

So who might this burning flipper be? We are seeing that a "Trust" is listed as the owner...and the address listed appears to be for a business management consulting/lobbying firm in Beverly Hills. Of course, we do our homework and looking deeper it appears that one of the partners of the firm is the one who is the owner of the trust.

Anyways, the MLS has this as "looking for backup" so we will have to see where it ends up selling for (if it closes). I don't remember this being on the market for very long so you bulls out there can get excited about a possible quick sale, but again, we are more concerned with all speculators heading for the exits and possibly taking losses as they rush out.

"The 90402" - Part 1

Address: 416 17th - 90402

Details: 2,059 sq ft house on a 7,500 sq ft lot. 3 bed/2 bath...flipped condition (new appliances, floors, paint, etc).

Description: A picture-perfect and classic home (3 + den) that has just been remodeled and updated. Features a wonderful living rm. With views of the wrap-around deck and backyard ---and with ideal flow to the yard/deck that is great for entertaining. An updated kitchen w/ new cabinetry and all new bosch appliances. New wood floors. The perfect home for the holidays and for every season. Franklin school district. Open sun dec 9th 1:00-4:00

Previous Purchase: 10/18/06 - $2,042,000

Listing History: 11/29/07 - $2,550,000

I have gotten a lot of comments here about 90402. I have also seen a lot of debate over on Westside Bubble about 90402. So we are going to do a bunch of posts on 90402 so hopefully people can get it out of their systems and stop wondering about it or thinking that it is immune, special, etc.

Our opinion the entire time has been that 90402 will be one of the last places in Santa Monica to get hit. So call it a delay, or a lag, or denial holding out longer than it did in the other zip codes...whatever. We have seen some steep declines and rollbacks in other zip codes (and mainly on condos) so it makes sense that 90402 is now starting to show more cracks. Through the run up, we have seen that 90402 was subject to massive speculative investment, flipping, spec house building, etc (we even heard that some of the infamous local real estate agents were "investors" in some of the spec projects). The first signs of the area showing weakness were when some high end specs started having trouble selling. We saw multiple price cuts on some new spec homes and sales did not ensue. I did some posts on this in the past and we will revisit the spec homes in the near future. For now see here, here, and here.

Just so you don't jump all over me here, we are not forecasting declines which would make the area "affordable" under traditional guidelines. It is a very nice area that is always going to be home to an affluent (or highly leveraged) group of people. That being said, we think it is possible to see real declines of 33% or higher (nominal declines could then be 25%+ or so). Of course we don't know for certain, but we think there is a good chance of something like this occurring. See Westside Bubbles site for graphs and info on the 90402 decline during the last down cycle.

For now, we are going to look at some flippers and see how they are doing.

This flipper bought 14 months ago and appears to have redone the kitchen, floors, paint, and maybe some other items. I don't know if any walls were moved or anything substantial done, but it did take over a year to get it on the market so a decent amount of work was likely done here...OR maybe this was a planned tear down and spec house building situation where someone got cold feet?

Holding Costs: $155,000 interest/opp cost + $26,000 tax = $181,000

Agent Commission: $127,000 (assuming asking price obtained and commission at 5%)

Total: $308,000 + $17,000 (closing costs, fees, any permits, water, electric, trash, insurance, etc) = $325,000

So that means we are into it for $2,367,000 PLUS construction costs. Racking up $100K, $200K, $300K, or more on even small time remodeling items isn't that hard in Santa Monica. Obviously we don't know what was spent here but $100K+ seems highly likely.

If you aren't convinced that seeing flippers start to get into trouble is one of the early signs of a declining market, maybe you should think about how it wasn't all that long ago where $2.5M was almost considered a tear down (a bit of an exaggeration but $2.2-$2.3M seemed to be peak tear down values...they appear now to be down 10% or so and hovering just below $2.0M). Now, you are looking at a 2 story house with a redone interior which hasn't even had its first price cut yet. We think times have changed.

Sunset Park - The Airport Flip **Update 1, NOW AVAILABLE FOR RENT**

Address: 2314 Pier - 90405

We previously featured this attempted (and currently failing) flip here back in September.

Also, Westside Bubble did a post on the property when it was available pre-flip.

Our update today is that since this flipper couldn't afford face reality and lower the price anymore, they have now put the property up for rent as well (at $4,950/month)!

Rental Description: Most beautiful view home in Santa Monica. Off of 23rd St. Totally redone inside and out in exquisite taste. Most gorgeous back yard. All fenced in for privacy and security. Two car detached garage. A/C. Tank less water system. Elaborate security system. Most outrageous, brand new, never used kitchen and baths. Shimmering hardwood floors. View terrace. Must see!! Also for sale for $1,195,000

Previous Sale: 3/23/07 - $920,000

Listing History: 7/9/07 - $1,250,000
Reduced: 08/17/07 -- $1,250,000 to $1,195,000

Rental Asking Price: $4,950/month

Not sure when it first went up for rent (maybe 10/12/07 since it is the last "updated" date on the MLS rental entry), but now after 152 DOM and only one stale price cut, this thing still looks overpriced on both a rental or purchase basis.

Again and again, we see these flippers and speculators thinking the market will come back in a short period of time. Our advice would be to find the market price and sell because time is only going to make the loss worse. If this property were to actually find someone willing to rent it out at this high rental price, this would then become yet another piece of the "phantom inventory" that we have discussed before. We don't think the market is coming back anytime soon and we have no sympathy for these failed flips. If we knew how much they spent on upgrades we could calculate the loss but in the mean time, we can see that their expenses have to be somewhere in the $7-$9K/month range (at least $1M cost at 6.5% interest +1.1% tax +expenses, fees, etc).

This is a classic example of what can happen to you if you ignore market cycles and don't accept reality. Trying to flip a home on an airport that you bought in early 2007 was not a good choice.

2004 Rollback - From Delusion To Reality

Address: 2221 Ocean Ave #207 - 90405

Details: 1 bed/1 bath condo, 859 sq ft, $315/month HOA

Description: Open house sunday 2-4 pm** super spacious single level, light filled interior spaces with sophisticated designer upgrades -recessed lighting + crown moldings - 42" wall mounted plasma tv, samsung refrigerator/freezer, tandem parking for 2 cars, 200 cu. Ft. On-site lockable, storage, gentle ocean breezes year round. Steps to beach, trendy main street restaurants, and shopping. Easy walking distance to 3rd street promenade. ** open house sunday from 2-4pm. **

Previous Purchase: 8/4/04 - $580,000 (90% financing)

Listing History: 9/8/07 - $699,995
Reduced: 09/23/07 - to $685,000
Reduced: 10/14/07 - to $625,000
Reduced: 10/31/07 - to $585,000

This is our second 2004 rollback featured on this blog. This seller first thought they could walk away with a nominal profit of $120,000 when they listed in early September. That type of delusional thinking quickly faded as three price cuts have brought us back to reality. Judging from the pricing strategy, it seems like we are overdue for another price cut...but another cut brings the asking price below the original purchase price way back in 2004. That is an emotional barrier that is hard to break (unless forced) for a lot of sellers.

This exact unit sold for $300K in mid 2001 and several comparable units in the building sold for $325K and $335K in mid 2002. We aren't sure what year or level that prices will roll back to, but if you think we could unwind the majority of the bubble then maybe these are levels to look at. Its your call.

Lastly, we have heard a lot of banks, lenders, builders, investors, etc come out and talk about loan vintages as if anything prior to about early/mid 2005 is fine or at significantly less risk because HPA (home price appreciation) will prevent losses...we are becoming increasingly skeptical as we find more 2004 and early 2005 rollbacks. Luckily for the lender, these people put 10% down as a cushion but this could easily be wiped out with another price cut.

Just In Case You Were Getting Too Bullish On 90403...

Address: 2714 Washington Ave - 90403

Details: 4,400 sq ft, 6 bed/5 bath house on a 6,664 sq ft lot, pool, poolhouse, rooftop deck

Description: 20's spanish charmer. 6 bedrooms + 5 bathrooms, 1+1 bonus room. Pool, spa, fountain & slide. Quiet tree lined street. Prime santa monica location. Large redone kitchen & family room. Formal dining rm. Large master bedroom with his and hers dressing rooms & office. Ocean views from large rooftop deck. Must see! Check with franklin school district for availability.

Previous Purchase: 1984...some remodeling has been done since original purchase

Listing History: 8/13/07 - $2,850,000
Reduced: 09/27/07 - to $2,690,000
Reduced: 10/31/07 - to $2,550,000
Reduced: 11/28/07 - to $2,350,000

This house is only a few blocks away from our last featured property on 25th street. While this lot is smaller and the location isn't as good as the one on 25th (not to mention that this is older construction and not super premium), it goes to show that not everything in this area is moving super quick or at elevated prices...

The lot alone (with plans and permits) apparently sold for $1.95M on 25th but just a few blocks away (in the same school district) you can buy a large, 2 story home with 6 bedrooms and a pool for just $400K more. Hmmmm, I guess 90403 might not be as special as some think. Prices appear to be coming down...except for the outlier situations like the one on 25th.

Jumping The Montana Gap...90403 "Villa"

Address: 933 25th Street - 90403

Purchase Info: 8/1/07 - $1,950,000 (per multiple real estate agent fliers...not shown on public records)

Details: Empty 8,350 sq ft lot (house already bulldozed) with a fence around it. This property was on the market earlier this year (sometime around June) for $1,799,000 and was being marketed as: "The work has been started for you - the lot is cleared and fenced! Plans for a wonderful new 6,000 sq. ft. Tuscan home exist and are ready..."

Construction has just started and this last weekend there was a little get together out front where people could meet the developer, owner, real estate agent, etc. We learned a few things that are simply too significant to ignore.

1. The new "villa" will be a total of 7,000 sq ft (or maybe even 7,500...can't quite remember). 5,000 sq ft above ground (city limit) and an additional finished basement.

2. Very high end construction with pricey materials (think imported marble, etc) may bring construction costs alone in the $2M-$3M range.

We are featuring this because this might just be one of the most bullish developments we have seen lately and it represents a significant milestone for 90403. One block north of this house is the newly completed spec house on 25th (also south of Montana) which was recently removed from the market but last asking $3.0M. Also there was the spec house on Yale recently asking more than $3.0M...

But never before have we seen such massive square footage, high price paid for the lot, and extreme amount of money spent on construction in 90403. WE ARE SOUTH OF MONTANA here so this comes as a bit of a surprise because one could go north of Montana and buy almost any new high end spec for $4-$5M while avoiding the headache of building. But apparently this guy just wants his own dream home built to his tastes. Wow...looks like the $5M ballpark is possible south of Montana (unless prices erode).

Ultimately we think this is more of an outlier in the present sense but a possible sign of things to come during the next up cycle in SM real estate. We are sticking with our thesis of declining market conditions over the next several years at a minimum because we don't think there are enough people with $5M to spend on their dream "villas" to save the market.