I have the opportunity to buy in Avenue One.  The cost for a 1B (- 725sqft -) is 385, down a significant amount from last year.  The incentives currently are 5,000 in closing costs and 2 years worth of association fees (~310 month).  What is the community recommendiation?
Thank
-bix

I would recommend taking the time to really educate yourself about the housing market before making a decision either way. As you said, prices have fallen considerably in a short time. This tells you that the market is in flux. Should you keep waiting for prices to fall even more, or should you buy now while the getting is good? Only you can decide. With a $385K purchase, there is a lot at stake, and you should really invest at least 20 or 30 hours in learning about what is going on. You read Consumer Reports and edmunds.com before buying a new car, right? Well this is ten times as big a deal.
 
If you don’t have any training in economics, I would highly recommend reading a basic microeconomics textbook or even just a couple of pop economics books before you tackle the specifics of housing. "The Underground Economist" and "The Naked Economist" were both very fun to read, and can be found at B&N.
 
Some people will tell you that if you can afford it, and feel good about it, then you should go for it. IMHO this is just crap. Yes, emotion matters, but the bottom line matters too. You have to weigh the costs and benefits. There are such a thing as bad deals and good deals, and when it comes to something as expensive as a home you should really work hard to try to get a good deal.

Through this blog/forum and others dedicated to the OC, looking at ZipRealty and other places online, you will probably agree that the average asking price per sq ft in Irvine is in the $400 - $425 per sq ft range.  Going with this valuation, the current asking price on the 725 sq ft condo should be $290k - $310k.  The stated asking price of $385k works out to $531/ sq ft, i.e. a total ripoff.  If you can get them down to the $300k level, then I would say you have at least a "market priced" deal (we can argue ad nauseum (sic) if the market is overvalued or not, but that’s for the overall marketplace to decide).
Another valuation model is the rent vs. buy decision model a version of which goes something like this: if you agree to pay the asking price ($385k in this case) with say a 20% down, 6.5%/30- year fixed loan, your monthly P&I (principal & interest) payments would be (ta.. da..) $2443.  This is before you pay mello roos, property taxes, insurance and HOA (albeit deferred 2 years into the future) etc which will be in the $500+ range.  The valuation model applied to this case means that if the property was "fairly valued" then you should be able to rent this condo out at $2443 (at the very least) up to $3,000.  Will the market bear this rent?  If you could just find one little sucka…

Apply this rent vs. buy decision model in reverse…  Let’s say you mosey on over to the Irvine rental living website and find a 725 sq ft 1/br for oh say, $1,500 per month in the nicest part of town (I mean with the works.)  (Ahem) I will attempt to demonstrate for you what kind of down payment you would need in order to match the $1,500 rent:
You want your total payment to be: $1500.00
You will pay at least $500+ in non-P&I payments: -500.00
Your P&I will be $1500 - $500 = $1000
What is the principal amount of your loan with a $1000 payment?  Drum roll please… $158,610!!!
In other words, you are going to have to come up with a down payment of $385000 - 158610 = $226,390 in order to break even using the rent vs. buy model.
So you decide…

crucialtaunt,

Welcome. Nice analysis.

biscuitninja,

Don’t do it. Prices are just starting to fall. Crucialtaunt’s analysis is probably going to be close to the prices these units sell for in about 3 years (maybe a little higher if you include a 20% downpayment.)  Nobody here would like to see you lose half your money.

feels like they’re selling very well, and might increase the price for the new phase

"feels like they’re selling very well, and might increase the price for the new phase"

Feels like you are listening to realtor nonsense talk. They are not selling well, if they were, they wouldn’t be offering the big incentives. There is little or no chance of a price increase, but the sales agent is likely to tell you that to try to create a sense of urgency to buy. If you want to live there consider renting for a few years until the prices come back to reality.

Yesterday I saw a truck towing a rolling billboard advertising Avenue One driving around woodbridge.  I find it hard to believe that a rolling billboard would convince someone to buy one of their condos, but that’s just me.  This advertising tactic doesn’t sound like something they would do if they were selling well.

Well I decided to not go with the 725sqft condo.  But I did buy the 602ft condo with a little more incentives on it, I have a 1031 account with some money that needed to be spent.  I essentially bought it as a rental property, a family friend needed a place for her daughter (*MD student*).  They immediately signed a 2 year contract.  Great people and extremely smart daughter.   After everything is said and done I will be a income producer for about 1k a month, nothing spectular, but better than the 1031 money getting taxed.
I did look at some Condos in Eastern Irvine.  The cost per sqft was MUCH more reasonable at $410 Sqft.  And of course bigger to boot.  Anyway thanks for the information (Thanks crucialtaunt ).  ON a side note my rent right now is 1600 getting set to go up to 1700 a month for a 750sqft.  So its not much of a leap, especially in another year or two, but its no quite there.
OH well take it easy
-bix

"After everything is said and done I will be a income producer for about 1k a month."
I’m a little confused. Could you explain what the above means exactly? The condo is paid off, and the 1K is what you are renting it for minus HOA/taxes/insurance? Thanks.

Maybe I should sharpen the sarcastic notes in my posts so they don’t sound that positive!
(bow in contrition)

BigMoneySalsa, yes, pretty much what you stated.  I would have liked to buy in the same area to keep watch over the rental, but unfortunately it was just too much for me to spend out of my own pocket (not 1031 account).  Anyway hope things are going well there.
-bix

For those who are unfamiliar, I think biscuit ninja is doing a 1031-exchange from previous (sold) income property.  There’s a 45-day time limit to identify a replacement investment property to defer taxes.  You can read about it here:

http://en.wikipedia.org/wiki/1031_exchange

I am familiar with the concept of a 1031-exchange but I would like to see some economic analysis (hard numbers) on why spending the 1031 money this way is better than getting taxed on it.
This looks very interesting indeed…
Biscuitninja, could you share some of your numbers in detail so we can see what rationale you used to make it work and arrive at your decision?  Thanks

A 1031 Like-Kind Exchange avoids capital gains by transferring a low basis from one property to the next. In essence it is like getting a 15% discount because you avoid the capital gains taxes. However, even with a 15% discount, I don’t see how the math works.

IrvineRenter: "However, even with a 15% discount, I don’t see how the math works."
Thanks for reading my mind.  This is what I had in mind to say but wanted to give bix the benefit of the doubt to see what rationale he used to make this work for him.  Unless of course, he’s loaded, and all this is chump change for him, in that case why would be swimming with the "bottom dwellers" on this forum? 

You are right even with a 15% CG tax its a marginal deal, BUT once you start factoring in state taxes, fees and everything else, that number quickly grows.  Usually to 20-30%.  So a little 330k place comes something like 220ish and change.  Just about the break even point - worth it?  That’s for you to decide.  For me the tipping point is that I’ll make 1,000ish a month for doing nearly nothing.  After that I’m sure my rent would be a bit higher (200-300?), so I’ll still be making the same amount.  This is definitely a long term investment (4+ years easily) and quite frankly I don’t mind flipping houses is not "it" for me.
Oh well thanks for listening
-bix

Ohh forgot to add, i’m not loaded. I have a decent 1031 account (nearly 13 years worth of buying and selling), but I live like the rest and drive a crummy economy car (shh don’t mention the 600hp hot rod…).
 
good luck
-bix

Concession starts with real pricing, not incentives towards overly inflated retail value of those upgrades or paid HOAs or closing costs.  Remember, your property tax is ad valorem, which essentially means that it is computed based on the assessed value of the real estate.  In most cases, the assessed value is your purchase price, then readjusted to a maximum of 2% upward per year due to Proposition 13 (that is why people who bought and held on to their home from many years ago pay a much smaller tax bill than the recently purchased ones).  If there is a big shift in the housing market, i.e. a crash, you can request the assessor to re-assess the value of your home.  Unfortunately, your govt is a creature of addiction to your tax dollars and relies heavily on the property tax revenue to fund its coffers.  In other words, good luck!

Thanks for the information guys. I am learning a lot. I will be in the market to purchase a condo in Irvine in possibly the next year and I was looking into Avenue One or Watermarke condos. It is obvious that you can get a much better deal looking elsewhere but I appreciate the amenities, lifestyle, and "newness" associated with these properties. I’ve been watching MLS listings and it is apparent that these properties for sale are reducing in price. I see a few 635 sq ft condos going from 369k - 399k in the low end. I hope and speculate these prices will fall even more. What do you guys think and how low do you think they can reasonably go?
How does Avenue One and Watermarke compare to each other? Would you guys prefer one over the other? If so, why?
Are there any other condo communities in Irvine like these that are in a similiar price range?
Thank you in advance.
dayday

dayday,

If you want an idea of how low prices could go. Find out what the comparative monthly rent is for the unit you are looking at. Multiply that number by 150, and you will get a number close to the bottom. Take that rental number times 100, and you will see how low it could possibly go before cashflow investors would buy them. I suspect what you will find is that these prices are double their fundamental value. That is how upside-down this market is right now. The longer you wait, the better price you will get. These condo prices are going to crash very hard over the next 3 to 5 years: very hard.

IrvineRenter,
Thanks for your enlightening insight. It is good news for those who can wait 3 - 5 years but bad for me who is looking to get a place sooner than that. Where are you getting this information from? Multiplying the rent prices by 150 sounds like a good deal for Avenue One or the like  but I find it hard to believe owners of those condos will sell for that low. If it does go that low, I think they are better off keeping it for the long term.
Let’s say we are for sure that prices will continue to drop for the next couple of years, what would be a better option: To wait for the prices to hit rock bottom? Or to purchase soon with "low ball" offers knowing that the crash is common knowledge (if it even is) to sellers and RE?

dayday,

The bottom line is if you buy too early, you will go underwater, and depending how early, you may stay underwater for a very long time. Don’t expect a quick return of appreciation. It took 8 years for appreciation to return to the market after the peak in 1990. To "low ball" right now sounds like a good idea, but you won’t get any takers at a price that is low enough to protect yourself. This market needs to ripen first. In 2010, the low ball offers will probably get you something near 150 times rent. As you noted, "I find it hard to believe owners of those condos will sell for that low." Right now, they won’t. However, "If it does go that low, I think they are better off keeping it for the long term." This won’t be an option for most of these upside-down owners because the carrying costs will kill them. When you can only rent a condo for half your payment, you are sinking deeper and deeper in the hole each month. Most of these owners will walk from the property or sell it at a loss to prevent further losses. This is where the supply is going to come from that drives prices lower. If these people didn’t have to sell, prices would not decline much, or would do so over a very long period of time. Watch the supply and foreclosure numbers. This is where the action is. When those numbers are high, prices go down and will continue to do so until the numbers change. With all the ARM’s in the market, both of those numbers will be high for the next 7 years with the next 3 to 5 being the worst. Go rent a nice place, save your money, and be patient. That’s what I am doing.

dayday:  why would you want to pay even $369K for a 600 sq. ft. hole?  It is a tiny space, and to buy now is like catching a falling knife, even with a low ball offer.  With over $800 billion of ARMs scheduled to reset this year, you will see more condo units flooding the market.  I am guessing HOAs are outrageously expensive (which BTW does not go towards the principal paydown of your mortgage - it fattens the pocketbook of the property managers), property tax delinquencies are rising, interest rate may go up. If nothing else, the "urban living" sales pitch does not appeal to too many buyers, thereby limiting your ability to resale when and if you need to later on.  What’s more, when this bubble is pricked, the most impacted, I think, will be the condos.  The single detached homes will always have the intrinsic value to the buyers, and if all things being equal, will have the distinct advantage over the condos when there is a need to resale.

IIIrvine,
Thank you for your response. I don’t plan on buying immediately, maybe sometime in the next year or so. Until then I am going to continue renting. It does seem like rental prices are high. The "urban living" does appeal to me I have to admit. I just wonder how prices will look like in the next year until I am ready to buy. I’d be happy if prices dropped 15%. It is hard to predict how low they will go but the bottom line is that I will be purchasing a place to live in, not for investment. So even if prices continue to dropped after I decide to buy, I will be okay in the long term as I don’t plan to be a flipper. If I break even or even lost money after I decide to sell, it will beat losing money every month paying high rents waiting for prices to drop. Atleast paying a mortgage will go towards ownership of the condo.
Your friend,
dayday

dayday: "If I break even or even lost money after I decide to sell, it will beat losing money every month paying high rents waiting for prices to drop. Atleast paying a mortgage will go towards ownership of the condo."
Let us put some numbers behind those words…  Assume $400,000 condo, with three different down payment scenarios, 5%, 10%, and 20%, each with a 30-year fixed loan, a 5 year holding period, and a scenario in which the market drops a meager 15% in five years (to quote from your post, "I’d be happy if prices dropped 15%.")

1) 5% down, loan = $380,000, 6.375% fixed for 30-years no points.

Monthly P&I Payment = $2,371, Principal Balance at the end of year 5 = $355,206
Market Value (MV) at the end of year 5 (assumed 15% decline above) = $340,000
MV net of Selling Costs (assumed 6% + $2,000 misc. fees) = $317,000
Cash needed from seller at closing = $355,206 - 317,000 = $38,206

2) 10% down, loan = $360,000, 6.375% fixed for 30-years no points.

Monthly P&I Payment = $2,246, Principal Balance at the end of year 5 = $336,511
Market Value (MV) at the end of year 5 (assumed 15% decline above) = $340,000
MV net of Selling Costs (assumed 6% + $2,000 misc. fees) = $317,000
Cash needed from seller at closing = $336,511 - 317,000 = $19,511

   3) 20% down, loan = $320,000, 6.5% fixed for 30-years no points (eloan.com would not give me a better rate for no points for this down payment).

Monthly P&I Payment = $2,023, Principal Balance at the end of year 5 = $299,555
Market Value (MV) at the end of year 5 (assumed 15% decline above) = $340,000
MV net of Selling Costs (assumed 6% + $2,000 misc. fees) = $317,000
Cash <u>Due</u> to seller at closing = 317,000 - 299,555 = $17,445

So only a very high! down payment will give you enough equity cushion so you don’t end up burning a huge gaping hole in your pocket when you sell.
Let me give you the renter side of the picture.  Let’s say you have the $80k today, but you decide to join the wise bubble sitters like us and bank the cash in a a 5 year CD at 5.16%.  (Before you start arguing why a 5 year CD is not such a good idea, I am just trying to keep the calc simple here, so bear with me).  At the end of year 5, your cash will be worth roughly $103,000.  Let me add to that the following: You will be saving anothe $800 - $1000 per month in renting a similar unit for the next five years.  If you are a saver not a spender, you can bank $800/month in a high yield savings account of around 5% and gain $53,000 at the end of 5 years in additional savings, which I will leave out of the picture for the moment.
Assuming you are still looking in the same price range of $400,000 five years from now, a nicer, 2- or even 3- BR condo that goes for say $475,000 today, would have dropped by a similar factor of 15% by then, i.e. around $400,000.  Then, you could put a hefty 25% down payment of $100,000 for a much bigger condo, one that leaves you a little bit room to grow into if you have a small family by then.  So, I urge you to read the above analysis closely and think about it very hard before you plunge into the abyss of home ownership in a market decline that has only just begun…

^^^  Excellent analysis there, this is pretty much what I came up with.  Its a rental property for me so I don’t mind a mild depreciation (in fact I even welcome it…).  But make no mistake if it goes 20% down, its going to sting and sting for a long time.  Right now though I’m putting 90% of the rent money into a high yeild accounts so that I at least put some of that money to use as either cash flow, interest earning money or money for another property.  Anyways thanks again.
-bix