It didn’t take the year long for Peak oil folks to see $100. The market didn’t take kindly to the fact that manufacturing was “unexpectedly” lower. Didn’t that hit everyone as a shock? And yes, we still have billions and billions of toxic mortgages ready to implode at any given moment. The only reason many of the bigger lenders and banks are holding any hope is the government is going to issue a full on bailout. In fact, the 10 year is already pricing in another Fed cut at the next meeting. It would seem that the time to buy a house isn’t right now especially if it looks like the Fed is going to cut rates to an absolute bare bones and you shouldn’t be surprised if you see 1 or 0 percent Fed Funds rates in the near future ala Japan. The gold markets love this information jumping up $25 on the first trading day of the year. You would think people would be cautious about buying or flipping homes but leave it to Culver City for another spectacular bubblicious flip into the middle of chaos. Today we salute you Culver City with our Real Home of Genius.

This 700 square foot 2 bedroom 1 bath beauty is a thing to marvel at. You can tell whoever remodeled this place has been watching a lot of Flip this House and Property Ladder. When you look inside you have your typical trendy countertops and upgraded fixtures; you know, the boob job and lipo for homes. The place is very nice and does everything it can do for the gigantic size of 700 square feet. So what is this place selling for in a down market? How about $599,000? Before you dial up your agent, let us take a look at some history on this home.

Sales History:

August of 2007: $452,000

Someone did a great job buying this place at below market value right when the credit crunch was devouring the entire housing market. I’m not sure how the home looked before all these upgrades but I’m sure it needed work. It must of taken a few months to get this home up to par and put it back onto the market. Initially this home was listed as follows:

October 2007: $639,000 to $619,000

December 2007: $619,000 to $599,000

This is such a typical flip and I don’t know how you feel when you watch those flipping shows, but there is absolutely no way the added value by a few cosmetic modifications is worth what people were paying for. Again, this is your typical housing bubble mentality. Just because a greater fool is going to pay more than you doesn’t mean there is any economic sense in what you are doing. In fact, I would add that the large number of flippers contributed to this bubble craze and are part of the reason the market is now tanking. Clearly this home wasn’t purchased to live in. It was bought as a flip with the intention that the added value of a few upgrades was going to yield them a large sum of money in two months! Let us do some rough math like they do on those shows:

Purchase Price: $452,000

Budget to Fix: $50,000 (I’m estimating here on my own experiences in real estate with contractors and really, how much can you do with 700 square feet?)

Sales Price: $639,000

Commission: $32,000 (5% at going market sentiment)

Total Profit: $105,000

Damn! You mean we can all make $51,000 per month simply by arranging a team of sub-contractors, adding a bit of paint, going to Home Depot for your typical countertops, and adding some stainless steel appliances? Where do we all sign up! Folks, this is precisely the reason why we are in the mess we are in. For this entire decade, it was so easy to bamboozle buyers into a home since prices were going up through the roof. It was possible to finance anything and everything while using other people’s money (OPM). Once a thing for savvy fast talking investors and late night infomercials, this became so mainstream that at one point in California 70 percent of all loans were adjustable rate mortgages.

Unfortunately in any bubble, people will make tons of money and people will lose tons of money. What those flipping shows don’t tell you is what happens once a real estate market crashes. Their projections are absolutely absurd and I wonder how many of those shows will remain once the dust settles in a few years. Once you sign that contract, that home is all in your name. Let us run the numbers but with the current real life scenario:

Purchase Price: $452,000

Budget to Fix: $50,000

Sales Price: $599,000

Carrying Cost: $12,720 *(4 month carrying cost assuming 6 percent loan)

Commission: $29,900 (5% at going market sentiment)

Total Profit: $54,380

Suddenly it doesn’t seem so easy to make quick money especially when there is a glut of homes hitting the market and credit is much harder to come by. The bad news for this flipper is the current market is declining fast in this area:

Median Price Per Square Foot

Q1 2007: $546.44

Q2 2007: $573.3

Q3 2007: $634.24

Q4 2007: $578.25

Sales

Q1 2007: 12

Q2 2007: 15

Q3 2007: 14

Q4 2007: 5

Even at fourth quarter price per square foot, this home should sell for slightly over $400,000. If today’s market is any indication, we are going to have a lot of what we had in the third and fourth quarter of 2007.

Today we salute you Culver City with our Real Home of Genius Award.

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