Five Fairy Tale Endings

This Los Angeles Daily News article profiles four San Fernando Valley buyers who recently closed escrows on properties in Chatsworth, Winnetka, Van Nuys and Woodland Hills, and a fifth in the Antelope Valley.

The story is a revealing snapshot of the housing market in the Valley today:  four of the five new owners are first-time buyers; four of the five homes were foreclosures or short sales.  The four SF Valley sales averaged under $400,000.

Depending on the eye of the beholder, these stories cast either a promising light, or a chilling gloom, on the state of the market.  Those with a positive spin, which include the buyers themselves, see their stories as emblematic of opportunity realized.   Many of them might have been shut out of buying their own home in a market which, even after seven months of declining prices, posted a median price of $525,000 in February.

But a closer look at these sales suggests a less sanguine view of the market overall.

One of the profiled buyers prevailed in a multiple-offer situation by making an all-cash offer on a foreclosed Ventura Boulevard-area home listed at just $329,000, more than $500,000 less – that’s right, half a million dollars less- than it had been refinanced for in May 2007.  A savvy strategist, he bid about 2% above the asking price.  That premium, along with the all-cash offer, won him the deal.

A great story, and a great coup for this buyer.  But … how many of us have $300,000-plus in cash sitting around to make an offer like that?  The upshot:  this story is neither typical nor promising for the vast majority of homebuyers. 

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The young buyers of the foreclosed house in Van Nuys call it the Disneyland house – but not because it’s their “magic kingdom.”  Rather, says the owner, “Everything is Mickey Mouse.”  Squatters and vandals had all but gutted it, even stealing the copper pipes out of the house along with several air conditioners.  (Reuters reports how some houses in places like Detroit are worth less than the copper plumbing in them, owing to a 400% rise in coppper prices in three years.)  Central heating and A/C had to be installed.  After six weeks of hard labor, the couple still have to keep a nearby apartment to sleep and shower in.  Although I credit their grit, it’s not exactly my vision of the American Dream.

The other buyers’ stories, nearly all involving distressed sales, are less extreme – but no more typical of a healthy market.  In the Valley, asking prices fell another $5,000 just this week, and up to half of all listings here are foreclosures.  Despite the occasional and exceptional good fortune of a few who find their way, it’s still a market that’s deep in the wilderness.

  • RE_Investor

    As a percentage of the population, there are a lot more people with $300K cash in L.A. than most of the country.

    Also, many people can get access to $300K cash — a temporary loan from their 401K, or from a line of credit, for example.

    What people don’t know is that many banks have special programs that let you finance a first mortgage after you’ve closed escrow. The terms are the same as if you were to get the mortgage as part of the escrow process. You usually have to apply and close on the loan within 30 days of the purchase. You then use the mortgage money to pay back your loan or line of credit.

    For example, let’s say you have $35K cash and can take $300K from a line of credit. You pay $335K cash for a house and close the escrow. You immediately take out a first mortgage of $300K (financing about 90%) and pay off the $300K line of credit. This should be very easy for the profiled home buyer to do, especially if he will be using the house as his primary residence and assuming good credit.

    These programs are typically for investors, though. There is an element of risk. You won’t have a bank to independently validate your purchase price during escrow. If you pay too much, you won’t be able to get a mortgage later.

  • Tim Hebb

    Thanks to “RE_Investor” for reading; I hope you will keep following our blog and keep us in the know on insider strategies like this.

    I would want to be very sure I’d qualify for a mortgage after the fact, and not be left holding the bag on a $300K – or more – line of credit loan.

    Any advice on banks to approach for this kind of deal, RE_Investor?

    Tim

  • http://losangeles.redfin.com/blog/author/cindy.allen Cindy Allen

    Thanks, Tim. I know I could probably pick something up for $450K, but I fear it will be an unlivable dump. I just can’t bring myself to shell out that kind of money when less than 10 years ago I bought a huge, brand-new home in SoCal for less than $200K. If that means I never own in L.A. and then move to North Carolina and buy a KB Home for $90K cash, then so be it.

  • RE_Investor

    Hi Tim,

    I thought about this a little more, and typical home buyers probably shouldn’t try to pull off stunts like using a line of credit to buy a house for cash. The home purchase process is complicated enough as it is. And there’s a good reason why the typical process is followed. It really protects all parties involved.

    One complication is if you use up your line of credit, it will dramatically affect your credit score and your ability to get a loan. So unless you are clear about your intentions from the start with your mortgage broker, and he knows what you are doing, you may find it really hard to get the mortgage after you’ve spent all that cash, even if you are pre-qualified. That’s why programs like these are usually used only by investors (also known as “speculators”).

    As for banks, I don’t know if the rules here allow me to name any. I’ll get around that by saying a well-known retail consumer bank, based in Charlotte, was doing this as of November 2007. They call it the “Delayed Purchase” program. I’m sure other banks have it as well.

    That said, a cash offer in itself is not that strong of a card. It may sound sexy to pay cash. But a bank’s check is as good as a home buyer’s cash. Usually a cash transaction is needed only if time is critical. For example, to beat a trustee’s sale. Most transactions will close way before then, or not happen at all.