Commercial Real Estate Crashing

It's not just the housing market that's taken a dive. Things have started going south in commercial real estate, too. Here's an excellent post by a Globe Street blogger about the crash that is slowly going on in commercial real estate: Slow Motion Crash.

I source a lot of off-market commercial deals for select investors, and I certainly have seen an increasing difficulty in getting deals done this year on the commercial side. The blogger points out that many sellers are still in that unrealistic expectations stage, where they're still trying to get top dollar for their properties at a time when buyers (if they're actually buying) are expecting to pay less. I would add that I'm seeing a general reluctance of many buyers to close deals in the midst of credit problems, financial market problems and a lagging economy. In fact, one of the buyers I know told me several months ago that they were simply going to take the year off (at least until the 4th Quarter). And beyond just a couple of bloggers, Wachovia earlier this month issue a negative report on the state of commercial real estate. Finally, here in L.A. (and elsewhere) we've got some commercial real estate companies already encountering serious troubles, including Meruelo Maddux and Maguire Properties among others. Yes, the economic malaise has indeed spread to commercial real estate

Christopher in Los Angeles Times

One of the L.A. Times' columnists, Meghan Daum, featured me in an article she wrote this weekend about the real estate market. I spoke the truth and told her the real estate market probably wasn't going to get better this year. (I tried to be a bit more colorful in my quote.) Of course, I said a lot more than the quote she put in the column. But as a former newspaper reporter myself, I can't complain.

Here's the link to the story: Christopher in Los Angeles Times

OK, so what else did I say that she didn't print. I explained to her the wave of foreclosures hitting the markets hasn't lessened. In fact, May was a record for foreclosures and ARM resets don't peak until the early fall. So the rest of this year is still going to see a lot of new foreclosures hitting the market. I also told her that lending problems have not been solved, and until problems in the financial industry are fixed, the housing market isn't likely to improve as a whole. However, I said that some areas of town are nearing the bottom, while some areas may still have some dropping to do. And in some areas, we may even see some improvement and possibly the end of declines sometime next year, but other areas will suffer much longer. And that assumes some of our problems are fixed. If you read this blog even infrequently, you'll know that I constantly talk about how the real estate market is not one thing, that it varies from neighborhood to neighborhood, and even within neighborhoods -- especially in Los Angeles.

Overall, Meghan Daum's column makes a good point, namely that the "six months" advice is a myth. She also seemed a bit frustrated by her inability to pin down an answer. But I think that's the reality of this terribly unpredictable market and some problems we're struggling. Nonetheless, there are some great deals on houses right now in areas where prices have come down considerably. Ultimately, it has to be an individual choice. If a house you really want is available and in your price range, waiting 6 months (or 12 or 18) may not be a good idea. Regardless, with the price reductions we've seen already, homebuyers are better off than people who bought in 2007 or 2006 or 2005, and in some cases going back even further.

Is Flipping Time Here Again?

What a crazy thought!

How could anyone think of flipping in this horrible real estate market?

Well, in the past few weeks, two investors I work with have asked me to be on the lookout for possible houses to flip in the coming months. They are noticing something that I am noticing: There are some super-cheap houses being dumped on the market by lenders in neighborhoods where prices will never fall that low.

For example, in one neighborhood I watch closely -- where no home has sold in the last year for less than $925,000 -- one lender dumped a home on the market for around $650,000. It was promptly snatched up. The home was a cosmetic fixer.

There are others. If you buy one of these cheap homes and actually live in it for several years, buyers can walk into some serious equity even if the market continues to decline dramatically. Or you could try a flip. But in this market, flipping is a dangerous game.

In the flipping heydays, many people could overpay for a property, overpay for renovations and sell the property for less than it should sell for – and still make money. Nowdays, you can do everything right – and still lose money.

This is definitely not a flipper’s market. Just see what’s happened to the No. 1 celebrity flipper, Bravo TV’s Jeff Lewis.

But it can be done.

The greatest Mega-Mansion play

There was a great story in the L.A. Times this week about the contunied heavy pace of mega-masions being built in Bel-Air Beverly Hills and Homby Hills. The continued strength of the ultra-luxury market in Los Angeles is something that I've talked about repeatedly in this space in the last year as it's been noticed by myself and others that work with luxury homes.

If you missed it, here's my previous posts about this topic:

• The Real Story on Luxury Housing in L.A. -- Part 1
• The Real Story on Luxury Housing in L.A. -- Part 2
• Off-Market Mansions in L.A.
• L.A. Market for $10 million+ homes

Those of you who know me well know I've been working with an experienced mega-mansion builder to put together a mega-mansion development. We have targeted the land and planned out the development. It's an incredibly conceived project. But given the current economic environment, it's been difficult finding an additional equity partner even for an experienced developer.

That said, there are many ways for a possible JV partner to come into this project. It could be simply as an equity partner. Or it could be someone who simply wants to build one of these homes, but instead of building a home just for themselves, they can leverage the dollars they'd be putting into their own house into several others and make a substantial profit. Either way, it's an opportunity to be a part of the most incredible luxury housing projects in the city's history and invest in one of the only still-strong segments of the housing market.

Record Foreclosures in Los Angeles County

Los Angeles County had a record number of foreclosure sales scheduled in May, according to propertyshark.com.

Not all of these auctions will end up happening. Many homeowners will save their homes from being sold on the courthouse steps. But it is a dire state for a homeowner to have a foreclosure auction scheduled. And in May the number of L.A. county auctions increased 17% over the already high levels in April.

Once again, the hardest hit areas are around Palmdale/Lancaster. Within the city of Los Angeles, the worst areas were Sylmar, Southwest L.A., Pacoima, Reseda and Panorama City.

Here's the 10 zip codes with the most new foreclosure auctions scheduled in May:

ZIP CODE	CITY	# of new scheduled auctions
93550	Palmdale	233
93535	Lancaster	183
93552	Quartz Hill	114
93551	Palmdale	111
93534	Lancaster	99
91342	Los Angeles (Sylmar)	97
90044	Los Angeles (Southwest L.A.)	88
90650	Norwalk	87
91331	Los Angeles (Pacoima)	84
91335	Los Angeles (Reseda)	80
93536	Lancaster	80
93536	Lancaster	80
91766	Pomona	73
90805	Long Beach	70
91402	Los Angeles (Panorama City)	61

Is it possible? Cash flow rentals?

The declining property values and preponderance of foreclosures in certain areas of Los Angeles have produced an opportunity that has not been available for years: Cash Flow Rentals.


In certain parts of town, REOs can be purchased in bulk at levels that allow for homes to be purchased and rented at a price that cash flows – even after subtracting for expenses and professional property management.


For example, in the West San Fernando Valley, we are aware of investors who have been able to acquire homes in bulk for $250,000 or less in neighborhoods where the cheapest homes are selling for $400,000 or more.


A typical property might be purchased for $240,000 with $10,000 of fix-up costs. If the property appraises at $300,000, a 75% loan at 6% would work out to $1,750 per month including Principal, Interest, Taxes and Insurance. Home rentals in these areas are easily above $2,000.


Seldom in the recent history of Southern California have the rent-to-value ratio reached this kind of levels.


This would seem to indicate that the market may be near a bottom in some of these areas that have been flooded with foreclosures and where banks are parting with REOs at rock-bottom prices. However, there are still expected to be many more foreclosures coming onto the market yet this year, and the credit markets have still not solved their problems. Nonetheless, clearly savvy investors with the purchasing power of cash are starting to see some definite opportunities that have not been available for a long time.