August 6, 2008

It's A Good Thing Those Bank Owned Comps Don't Matter, Right?

246 2nd Street Kitchens: #1302 and #502

Let’s go straight to the SocketSite "apple in the making" archives:

Two months ago we noted the “Newest Comp For A Two-Bedroom Condo At 246 2nd Street” when the bank owned #1302 closed escrow with a reported contract price of $775,000 (roughly $125K below what #902 sold for late last year and exactly $220K below what the seller of #502 was asking at the time).
As we wrote at the time: Damn those unemotional sellers to hell. And once again, that’s not likely to be a neighbor(hood) pleaser.
And as a plugged-in reader notes today: 246 2nd Street #502 has returned to the market with a list price of $739,900. That’s a reduction of $255,100. And more noteworthy, that’s $210,100 less than what was paid for the condo over three years prior (12/9/05).
Now about whether or not those bank owned sales in San Francisco (however few and far between) are irrelevant or meaningless...
UPDATE: An excerpt from a plugged-in reader’s comment that shouldn’t be missed: "According to mls records that agents have records to. It sold for $950,000 in 12/05 but with a $110,000 credit to buyer at closing. I am quite sure this was never disclosed to the actual lending bank. NEVER would have flown."

And now we have our newest apple (and perhaps an answer to our previous "Can Bank Owned Comps Kill" headline): On 8/04/08 the sale of 246 2nd Street #502 closed escrow with a reported contract price of $700,000 (previous recorded sale price and building comp of $950,000 – or $840,000 if you back out the credit – in December of 2005).

UPDATE: Post being re-written, see comment below.

Can Bank Owned Comps Kill (Values)? 246 2nd Street #502 Returns [SocketSite]
The Newest Comp For A Two-Bedroom Condo At 246 2nd Street [SocketSite]

First Published: August 6, 2008 2:30 PM

Comments from "Plugged In" Readers

Is it illegal to not disclose credits to the lender?

Posted by: phatty at August 6, 2008 2:53 PM

Isn't this the building with the units with those huge wrap-around decks? Is that this condo?

Posted by: lolcat_94123 at August 6, 2008 2:54 PM

I believe that's less that it sold for originally in 2000.

Posted by: anon at August 6, 2008 3:14 PM

I think this sold back in 2000 for $675K.

If you noodle around on the property tax website, you will find that recent buyers who are now way underwater have stopped paying their taxes. Hard to imagine they're keeping up with mortgage payments - I mean, put a fork in it, this turkey is done.

I expect that as the bust unfolds, this whole building will spiral down. Typican bubble behavior - every dollar of phantom bubble equity will be sacrificed on the pyre.

Posted by: Satchel at August 6, 2008 3:30 PM

You guys know that District 9 actually had a great July for condo sales, right?

Satchel, this is the type of language, language couched in "This has already happened and only the smarties see it" that made everyone get p.o.'d at you before. You start with the financials and before we know it here come the shadenfreude-laden prognostications. Meanwhile D9 did solid business in July yet it's time to talk about bank owned as if it's a leading indicator?

Posted by: fluj at August 6, 2008 3:57 PM

Yes, bank sales or REO property sales do affect the market and it would be a USPAP violation for appraisers to ignore them. In the 1980s we went through this same dilemna. It is an appraiser's responsibility to mine the data, so they should have adjusted the sales price for "conditions of sale" such as closing cost adjustment. The same is true for adding adjustments for deferred maintenance items (items that require immediate capital to make the property liveable). Getting good data requires research. Quality research is what you pay an appraiser for, not just downloading MLS data. Any idiot can do that. A good appraiser teases apart all the variables that create value and will start asking questions when something doesn't fit and has to consider all factors that influence value, including bank sale comps.

Posted by: Ruby at August 6, 2008 5:16 PM

I'm a little lost. This place closed escrow less than two days ago and now it's on the market?

Kind of a short hold period, isn't it? I realize circumstances DO change and all, but, two days?

Posted by: tipster at August 6, 2008 5:26 PM

Ruby, you're of course correct.

But there's a difference between not ignoring a point of data and the following. That would be seizing upon an REO, expanding it laterally as if it were legion, including an entire demographic of people over the course of a few years time, making fun of them, and predicting their future absolute asset losses.

Posted by: fluj at August 6, 2008 5:32 PM

$550K here we come.

Posted by: spencer at August 6, 2008 5:53 PM

What's the point of increasing the sales price and then kicking back money to the buyer at closing? I've heard of people doing it, I just don't get why...

Posted by: peninsula renter at August 6, 2008 6:15 PM

Ruby - your comment makes sense but it conflicts with what quakey b and other appraisers have stated. For example check out this comment http://www.socketsite.com/archives/2008/03/going_once_going_twice_sold_for_700000_41_federal_42.html#c382086 and other comments about REO sales not being considered as comps.

I'd like to believe your statement but now I'm confused.

Posted by: The Milkshake of Despair at August 6, 2008 6:16 PM

I'm wondering what this means for other buildings in the immediate vicinity - have prices at 199 New Montgomery Street or the Metropolitan shown any softness?

I can't imagine that the developers in the area are happy to learn that their comps have now been so substaintially reduced. I understood that the building in question was in good shape and that the developer had a good reputation. Anyone else know anything?

Posted by: Embarcadero at August 6, 2008 6:22 PM

Okay, based on a few of the comments above, it’s painfully obvious that this post needs to be completely re-written. A few points of clarification while we’re working on a re-write:

On 12/9/05 unit #502 was purchased for $950,000 (which included a buyer’s credit of $110,000). Earlier this year #502 returned to the market with a list price of $995,000, failed to sell, and on 5/21/08 the bank took possession. A few weels later the bank put #502 back on the market with a list price of $739,900, and two days ago it closed escrow with a reported contract price of $700,000. It’s no longer on the market.

Posted by: SocketSite at August 6, 2008 6:46 PM

I live at 199 New Montgomery, and have a colleague at the Metropolitan. With my RSS Craigslist feed on both properties, I have noticed units at 199 sitting on the market for several months, before being offered as rentals.

In addition, there were some foreclosures at the Metropolitan in June, as covered by SocketSite: http://www.socketsite.com/archives/2008/06/mini_meltdown_at_the_metropolitan_333_1st_street.html

Posted by: Mike S. at August 6, 2008 8:10 PM

I looked at a condo for rent in this bldg a couple of years back. The building isn't very upscale. Still, $667/sf in a decent neighborhood in SOMA, it's got to scare the SF-BLU people around the corner.

Posted by: sunnyvalesteve at August 6, 2008 8:14 PM

peninsula renter: "What's the point of increasing the sales price and then kicking back money to the buyer at closing?" I believe it was a way for people to buy/speculate on homes without tying up any of their own money. Let's say the market supported a price of $1M. A buyer would offer $1.15 M if the seller would rebate them back $125,000 after closing. The buyer would use this rebated money to make payments, simple improvements and hopefully flip in a couple of months for some profit. During the frenzied days, a bank would accept inflated appraisals which helpd support these kinds of schemes.

Posted by: young_parent_in_city at August 6, 2008 8:21 PM

"You guys know that District 9 actually had a great July for condo sales, right?"

Volumes were good on Pets.com stock, right up until the day they went out of business.

Volumes on Cisco stock were always over 50 Million shares as it dropped from 80 to 20 in the dot com bust. The number of transactions surged to 100 million when it hit $20 per share! Lots of people were buying.

Then it went to $11 per share.

http://finance.yahoo.com/echarts?s=CSCO#chart1:symbol=csco;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Posted by: tipster at August 7, 2008 12:03 AM

So you are predicting that SOMA condos are about to drop 45%? Just making sure I understand your analogy here...

Posted by: NoeValleyJim at August 7, 2008 12:54 AM

"So you are predicting that SOMA condos are about to drop 45%?"

50%.

By 2011.

Not just SOMA condos but everything in the city.

Posted by: diemos at August 7, 2008 7:05 AM

wow. now that is a ballsy prediction. are you thinking 50% nominal loss or 50% real loss?

Posted by: ex SF-er at August 7, 2008 7:47 AM

Definitely 50% off real prices. But since I can't forsee any significant wage inflation in the near future and we already have an example in the central valley of nominal prices off 50% and still dropping like a stone I'll go with 50% off nominal as well.

50% based on reversion to pre-bubble mean in price/income and price/rent ratios.

Posted by: diemos at August 7, 2008 7:56 AM

Let's here your predictions on the rest of the market.

Posted by: sparky at August 7, 2008 8:01 AM

I'm not going to get into % drops (real or nominal).

But one thing I'll point out, which is going to suprise everyone when it shows up over the next few years.

Everyone thinks there is a huge shortage of housing in the Bay Area (and particularly in San Francisco), such that any significant drop in price will quickly be stopped by the "pent-up" demand.

The hallmark of a bubble - any bubble - is that it oversupplies the bubble good as it inflates, relative to true demand. This is hidden from view in the inflation period, because holders of the bubble asset judge the risk of failure to supply the good as costless. For instance, during the Tulip mania, many merchants and speculators reserved their "best" bulbs for their pricate viewing and contemplation, even though the bulbs had finite life and were not worth anything unless they were planted. In the tech craze, companies deliberately restricted the size of the IPOs. Etc.

Let's see what the "true" demand is for Bay Area housing. They're already finding out in Livermore, Novato, Daly City, parts of District 10, District 3, smaller condos in SOMA, etc., and it ain't pretty if you gambled the next 10 years of your economic surplus on it. Coming soon to a street near you!

Posted by: Satchel at August 7, 2008 8:09 AM

Says one of the people who will buy back in once he sees a pricepoint he likes

Posted by: sparky at August 7, 2008 8:16 AM

>Volumes were good on Pets.com stock, right up until the day they went out of business.

Oh no! SF is going to go out of business and us homeowners will all be left with worthless deeds that aren't worth the money they are printed on. Every last piece of property will be liquidated to pay the creditors and all homeowners will be out on the streets.

Hmm...Pets.com....

Got Hyperbole?

Posted by: Rillion at August 7, 2008 9:11 AM

sparky:
Satchel's point is still valid even if he plans to jump in at some point.

there is of course pent up demand for the SF bay area. But that demand can change if/when forward looking fundamentals change.

For instance: when RE goes up 20% per year, year after year, RE becomes "safe" and "the best investment" so more people are interested in all facets of RE.
if (hypothetical, not my prediction) RE should fall 10% year after year, then RE would become "throwing money away" and so the demand curve could shift

we're seeing this to some extant with gas. As the price of gas shot up a lot of "hot money" (including mine) jumped into the energy complex. This forced gas prices up tremendously... but that forced people to change their behaviours (less SUV's, more Priuses/Priusi???) which reduced "pent up demand". so now gas prices are falling. (this is not to say gas/oil won't shoot up again by the way).

same with housing. the bubble pulled all sorts of people into the market that had no business buying homes. now that it is faltering, many of those people will go back to renting and/or living with parents/roomates, etc...

at some lower price people will jump in. but where is that price??? I think that's where you see a lot of argument.

the problem of course is that purchasing homes takes credit... so you need more than just a willing borrower... you need a willing lender. if home prices should start falling every year would lenders be willing to fund SF real estate purchases? I think you'll find that they are not (in fact, we've already seen some of this).

Posted by: ex SF-er at August 7, 2008 9:57 AM

Defininitely some ballsy predictions around.
50% off everything in the city says diemos. treeman said something similar when he said SF would fall harder than anywhere else recently.
Cooper (I think) said SOMA would fall 30% this year alone.
Wow is right.

Posted by: REpornaddict at August 7, 2008 10:55 AM

I wasn't making any prediction, just pointing out that things very frequently stairstep down. As demand increases in a certain area it doesn't mean that area is necessarily at some bottom, it just means that relative to the alternatives, whatever buyers out there perceive that set of supply to be the one they will purchase.

Just as district 10 is getting hammered right now based on subprime mortgages, a lot of supply in SoMa is second homes being put up for sale as people simply decide they don't want to have more housing than they need in a declining market. That boosts supply and starts pricing pressure there first. Prices are less sticky in SoMa and so the buyers out there (there are ALWAYS buyers out there) are responding to that. That's causing sales to increase there first.

As for prices generally, there is not enough information for anyone to really know. How many Option Arm mortgages are out there? Who knows, but 60-80% will end in foreclosure. That will be SF's equivalent of the subprime meltdown and so I think prices will fall more than anyone thinks.

But that storm is 6 months away. How the economy does in the next six months can alter the mix. What congress does when the rich they'd like to soak are getting soaked just fine by themselves will also play a part.

It's like trying to predict the weather 6 months out. The temperature will probably fall from what it is now, but beyond that, who really knows. Not me. Not anyone.

Posted by: tipster at August 7, 2008 10:59 AM

"Volumes were good on Pets.com stock, right up until the day they went out of business.

Volumes on Cisco stock were always over 50 Million shares as it dropped from 80 to 20 in the dot com bust. The number of transactions surged to 100 million when it hit $20 per share! Lots of people were buying.

Then it went to $11 per share."

So freaking what?

Posted by: fluj at August 7, 2008 11:27 AM

This thread is somewhat reflective of the volatility in the current market. It is natural for negativity to arise during periods where people are losing money, whether perceived or real. (You only realize a true loss if you're forced to sell in a down market.)

I am now a SoMa homeowner, in a more blighted area than 246 2nd, but what strikes me is the diversity of owners in the area (we're definitely *not* all in the same boat).

Just wanted to throw out some positive personal observations about our market:

--Those who pay cash for property (like the buyer who bought my SF house 7 months ago) are not worried about interest or foreclosure rates.

Buyers from foreign countries are getting even better deals than Americans due to the weak dollar. They see their "investments" differently.

The Bay Area in general has a healthy job market and a positive growth trend for the future, especially in areas related to biotech and renewable energy.

Many seasoned homeowners know the power of a diversified portfolio and have other investments and cushions that will carry them through the current cycle.

A total market crash is possible, but not likely. Far likelier is that most homeowners who can ride it out will regain all of their equity, and then some. That is the historic long-term trend.

Posted by: SomaSoldier at August 7, 2008 12:46 PM

"You only realize a true loss if you're forced to sell in a down market."

Maybe, but when the market drops, you still paid more than you had to, and you wouldn't have just thrown the extra money in the fireplace: you would have bought a MUCH nicer place with the money you spent to buy now or used it for other purposes.

Cash buyers aren't scared? I'm an all cash buyer. I'm terrified of interest and foreclosure rates because I know an increase in either drops the value of the property, and then I could have gotten it for less.

Foreigners? Those foreigners aren't going to buy today for 1/2 the price if they can buy next year for 1/4 of the price. The foreign newspapers have the U.S. real estate market in the toilet in two years. I suspect there is no more foreigner buying than at any other time, and it isn't very much.

Diversified portfolio? Many seasoned homeowners have toxic loans that we've never seen before in any cycle. Their homes are worth far less than the loan amount and their payments are about to double or triple in the case of option arms.

Ride it out? Why bother when you can walk away and get the benefits of a lower price years from now. They are going to walk. It's in their best interest to walk.

Posted by: tipster at August 7, 2008 1:10 PM

To change course for a minute, this thread is fantastic news. I, for one, really like this building and location, and would gladly buy here at the right price. Call me nuts, but I'd even take a 2/2 here over ORH or Infinity. Dead serious.

Better, more central location, and great city lights views from the northern side of the building. I don't need full amenities (and the $700/month HOAs that accompany them) when there's a 24 Hour Fitness across the street charging $40/month for a membership.

Posted by: Dude at August 7, 2008 1:44 PM

Says one of the people who will buy back in once he sees a pricepoint he likes

Which actually makes perfect sense. If Satchel were a perma-bear as many want to portray him, he would be totally irrelevant. But he bases his view on cold hard basic economical numbers, not wishful thinking like perma-bulls.

I've been a bull 10 years (1994-2004), and now I've been a bear for 4 years (2004-20??). I'll be a bull again and will jump in when the numbers will make sense again.

Posted by: San Fronzischeme at August 7, 2008 2:01 PM

Tipster: Your points are well taken. You focus on the negatives; I'll accentuate the positives: the sky has not fallen yet.

Posted by: SomaSoldier at August 7, 2008 2:30 PM

I was making a point out of Satchel being part of a bigger group. The group of people who could and will buy an SF home (again). He has said he would buy into St. Francis if the dollar figure is better. I think a lot of other people fit that bill. I for one would upgrade to St. Francis at a slightly higher number than Satchel and take a great property out from under him. But I digress.

On a large scale there is still an influx of people into SF everyday. And, the city hasn't been overbuilt by anymeans. Not in any family nieghborhoods for sure. So in short, I disagree with Satchel, I think there is pent-up demand in SF.

Posted by: sparky at August 7, 2008 3:28 PM

There's so much pent up demand that sales are lower than a year ago, inventory is much higher, foreclosures are increasing, and prices are falling. "Demand" doesn't mean dreaming of owning a home. It means actually being willing and able to buy one. The only thing keeping sales and prices up there from 2003 to 2007 was nearly free money, in SF just like everywhere else. That's gone now, and so is the "demand."

Posted by: anon at August 7, 2008 3:59 PM

"You focus on the negatives; I'll accentuate the positives"

When real estate is more affordable, that isn't a negative for everyone. Just for people who bought something they are planning on holding.

If real estate prices go down by half, you can sell your place at a loss but buy your much bigger place for less. That's as good for you as it is for me.

The sky most certainly has not fallen. Has barely even budged outside of District 10 and Soma. But call me when the foreclosures from the Option Arm resets begin mid next year.

Posted by: tipster at August 7, 2008 4:00 PM

"If real estate prices go down by half, you can sell your place at a loss but buy your much bigger place for less. That's as good for you as it is for me."

How is a loss “good” for anyone, especially if they owe more than the home is worth? So they sell, only to get into *more* debt?

I think the logic of my previous posts somehow gets lost in translation.

For example, “I'm an all cash buyer. I'm terrified of interest and foreclosure rates because I know an increase in either drops the value of the property, and then I could have gotten it for less.”

I can only speak for myself, but if I paid cash for a home today, and it was a home I really wanted, I wouldn’t care about other homes because I’d be happy in it. What you’re alluding to is really buyer’s remorse, which could happen in any economic state. Even when the economy is roaring along, you can still feel you’ve “overpaid” if you had to outbid 20 people, and the unexpected bargain comes along after you move in.

Posted by: SomaSoldier at August 7, 2008 10:11 PM

Ruby,

Someone might do the kickback scheme outlined in the article is if the buyer wants some extra spending cash. The reason the bank wouldn't want this is that the home is collateral for the loan in case of foreclosure, which is exactly what happened here. If the home is actually worth $850k on a loan of $950k then the bank gets screwed for $100k when the bank sells it for $700k after foreclosure.

And of course, the original buyer made out with $100k in cash for their trouble.

I wonder if there are civil/criminal cases for people that do this.

Any thoughts. . . ??

Posted by: Travis at August 23, 2008 12:37 PM

Oh, and more thing. . .

The fact that the bank backed a $950k loan when the property was actually worth $850k just goes to show you just how absolutely useless the whole appraisal process is.

Posted by: Travis at August 23, 2008 12:40 PM

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