How not to sell a house: The story of 3 Magnolia Drive

An update tonight on 3 Magnolia Drive, a foreclosed house owned by a bankrupt lender that was put up for auction on March 15 ... and still hasn't sold.

It's a nice enough house: 4 bedrooms, 3 baths, 3,238 square feet, in the Ladera Ranch section of Orange County. Built in 2003, it sold for $1.2 million in 2005, and went into foreclosure last year.

I reported last week that, at the auction at the Fairplex in Pomona, George and Kim Sarantos were the high bidders for the house at $705,000. Trouble is, the company servicing the loan on the house -- American Home Mortgage -- didn't accept their bid, and countered with a higher price, asking $40,000 more, according to Kim Sarantos.  After some haggling, and some frustration, she and her husband walked away.

"We just said, 'forget it,' " Sarantos said tonight. "It's not worth it to us."

American Home Mortgage -- which is in bankruptcy -- has the house listed on its website for $885,000. Because auction buyers agree to pay a 5% premium to the auctioneer, the true cost of the Sarantoses' bid was about $740,000. Because they felt they would have to put up even more money for some repairs and maintenance, they didn't want to pay much more than that.

"The house needs work, and by the time we pay all the closing costs, it's over $800,000, and it's just not worth it," Sarantos said. "This isn't going to be the last house out there for us. We didn't lose any sleep over it."

Thoughts? Insights? E-mail story tips to peter.viles@latimes.com.

Comments

[gary]

to ajax3456
Confused... the people you know buy billions of foreclosed properties and already know the market will go down another 80%???? Why on earth are they buying billions when they believe their own purchases will decrease. Did I read you right?

[Jonathan]

"Mission Viejo has the same problem as all of South OC. Too far of a commute to jobs and too much developemnt the last few years."

Yeah, I used to live next door in Lake Forest and it took me > 40 minutes a day to drive about 7 miles down the road. I hated that drive so much! Every day I dreaded going to work.

[Laker]

This lender is not only bankrupt, they are completely stupid.
Trust me that the person in charge was fired or will be very soon.
If they are lucky, they would get $650,000 at next auction...maybe...
The true value of this house is $300,000.

I have true life example on bank's greed and it goes back to 1994 (the last bust). My family placed a bid (offer) on a foreclosure house in Woodland Hills south of the bl for $270,000. The lender countered with $290,000. We walked away. After 4-5 months the lender called back and was asking $250,000...We countered with $215,000 and the bank accepted.....

Conclusion: Smart bank would have gotten $270,000 from us, Stupid bank indeed got $215,000 from us.....

[Santa Barbara Real Estate Voice]

I think it is smart of the couple to walk away...we are seeing banks trying to act like Realtors and they do not know the market of each town, neighborhood and street of where each individual house is.

To many factors go into a sale and why for example 2 identical homes can sell for $40,000 difference.

I unfortunately see more stories like this for the coming 2 years.

[RE Watcher]

A quick correction to our blogger - Ladera Ranch is not part of Mission Viejo. It's an unincorporated part of Orange County.

The commute to Irvine from Ladera isn't horrible, about 35 minutes. Commute home is usually less.

[RE Investor]

I understand what everyone is saying, but as someone who works in real estate, has seen this actual house in person, and has bought more than a few homes in my day, they made a bad decision by walking away, but the bank made a worse decision to haggle over an extra $40k. The neighborhood where the house is located is all homes in the $1mm range, with many homes selling for over $1mm in the last 3 months. This particular home needs about $50-75k of work to bring it up to the same level as the homes around it, but in 3 years it will be worth $1.2 or more with ease. That would be a nice return on an $800k investment, but if that was a financial stretch for this family, and if job security and finances are a concern, I can see not wanting to take the plunge. The bank was foolish to not take the offer based on a $40k difference however. There is a very good chance that this lace will sell for north of $800k in the end, but meanwhile instead of having money in the bank earning interest and/or paying off creditors, this property sits on their books languishing. Foolishness all around.

[IToldu2CashOut]

Man, I look at the house and even 300k seems a lot. It's in Mission Viejo? Come on man.

These people are still NUTS. INSANE! That house will see an 80% drop. Those people are SOOOO lucky they didn't get that house. So much better properties out there with ocean views in places like Dana Point and San Clemente for 700k. Welcome to reality, its going to hit you in the face.

[Gene J]

I have found realtors not making very big efforts to sell the forclosed houses for the bank. Around here they only have 1 picture instead of the usual 9, no details on room sizes or features and unless the house is in a bad area the price is too high.

Don't they realize they must compete with private sellers?

[IToldu2CashOut]

Don't these sellers realize that the rates are not going to stay down forever? Eventually inflation will go crazy in the next few years because we'll have the rate at zero. Rates will have to go up!!! As soon as rates start to go up again home prices will have to go down even further! and those drops are all going to be losses absorbed by the seller!

Sellers are crazy not to sell now when rates are low. I just can't comprehend how stupid some people are with real estate. Its like a whole industry with people with no common sense at all.

[Ace]

Ok, not to stand up for the banks here but saying a bank is greedy in this case is dumb. Of course they are trying to get every penny then can. They are losing HUNDREDS OF THOUSANDS OF DOLLARS on this transaction.

Of course the bank is stupid for not accepting the highest bid... but stupid is not greedy.

[GregoryZephyr]

A lot of the questions around why the bank won't sell at pennies on the dollar assumes there is some urgency to sell. Keep in mind this is not a situation like some small time flipper that has huge monthly mortgage costs and needs to get out from under that. The bank has likely already written off the loan balance or at least put it into a charge-off account. Without having to pay a mortgage, the vacant house itself doesn't cost the bank much to maintain--maybe $10K a year in taxes and let's say another $10K in minimal maintenance (lawn care & utilities). That means that the bank's decision was either accept another 40K less or hold on to it. From their point view that 40K could buy them another 2 years of holding on to it as a non-earning asset. They could also theoretically rent it out (maybe) and recover some of their carrying cost. Unless their bankruptcy proceeding requires liquidation, there's not much incentive to just dump the property at any cost. I'm sure they are betting that real estate values will recover in the next year or two and so dumping it now doesn't seem very attractive. In some ways, this is similar to airlines that own planes just parking them in the desert awaiting future use rather than just selling them at a loss.

[IToldu2CashOut]

Don't these sellers realize that the rates are not going to stay down forever? Eventually inflation will go crazy in the next few years because we'll have the rate at zero. Rates will have to go up!!! As soon as rates start to go up again home prices will have to go down even further! and those drops are all going to be losses absorbed by the seller!

Sellers are crazy not to sell now when rates are low. I just can't comprehend how stupid some people are with real estate. Its like a whole industry with people with no common sense at all.

[Long time listener . . .]

RE Investor, really? You think this house will appreciate from $800k to $1.2m in 3 years? Have you looked at the number of default notices/foreclosures/short sales in Ladera Ranch? The place is imploding. A quick search on Trulia for foreclosures alone pulls up 147 properties with a Ladera Ranch address, and there are over 330 listings all together there. Properties are selling for much less than what they previously sold for. To believe any property in South OC (or SoCal in general) will appreciate over the next couple of years is simply delusional. Ladera Ranch in particular was a community born during the height of the lending boom, and many of the houses were purchased by speculators and flippers. Prices have fallen steeply there.

[puckhead]

Itoldyoutocashout.com

Dude, chill out!!!! Rates are not at zero. We’re not going to re-visit the 1970’s with double digit inflation. The marco economics today is no where near what we have in the 70’s. Rates will stay low until we see growth in the economy. You sound like one of wackos hording food and gold during Y2K. There’s so much hysteria polluting the web it’s pathetic.

[anonymous]

puckhead,
low rates do not turn around credit contraction. credit contraction is turned around by the dissolution of debt. that means deflation. all the outstanding debt, and inventory has to disappear before the turnaround begins. and as you can see on the news feeds, the fed cutting rates to zero does not stop wells fargo from raising jumbo to 8%. lending institutions are now fearful of lending. the pool of potential homeowners has shrunk, one, because of the 'forward selling' the low rates and creative loan packages facilitated, depleting the future pool of applicants, and two, because credit will continue to become much tougher to get. Wells Fargo said they want 25% or 30% down on loans in 'high risk' areas, and guess what, LA is the highest risk area on the planet.

[formerlahomeowner]

GregoryZephyr,

"They could also theoretically rent it out (maybe) and recover some of their carrying cost."

That's a pie-in-the-sky theory. Banks are not and will never be landlords. They are not in the real estate/property management business. They are banks. The rest of your post seem plausible but haggling over $40K in a crashing market is foolish. That's why banks should never be involved in real estate transaction, just at the financing end.

[RE Investor]

This place has well over 3000sf with a decent yard, is on a cul-de-sac in a quiet part of Ladera near a great park for kids, and is surrounded by homes that are currently selling in the $1mm range. The only difference between this house and those around it is the fact that it was not finished with the same level of luxury (i.e. hardwood floors, granite, etc.) When I looked at this place before the auction I also looked at 3 other houses in Ladera in the same price range. Those other 3 were significantly smaller, but move in ready, without the need to do improvement work. All 3 are now in escrow for around their asking price. Simple truth is that Ladera, like a Coto de Caza, Nellie Gail, or Monarch Beach, will always have strong demand for homes in the $1mm+ range due to the settings and amenities that other communities cannot offer. As a result, while the homes that are 4br/2ba with 2000sf sit empty, those on the upper end of the spectrum sell. Maybe for a little less than asking, but they sell. The crisis will turn around in less than 1 year, as long s people keep moving to CA and OC in droves, the demand will always be there.

FYI, do not always believe the foreclosure listings on many websites. usually they are just a listing of homes where a Notice of Default was sent. That is the first formal step in a foreclosure, but is a long way from an actual foreclosure proceeding, and even longer from a bank owned sale or auction. Also, the vast majority of those listed in Ladera and elsewhere in South County are homes not in the size and price range of this particular listing. I may be wrong, and this place may not be worth $1.2mm in 3-4 years, but I may be willing to take a $745k gamble on it.

[firesale]

Fate stepped in to save the Sarantos about a
quarter million dollars. I hope they realize they've
been given a second chance to avoid such gross stupidity.
What would this have been worth in 2002?
Anything more and they're paying too much.

[pathetic]

ajax3456 - Come on, 80% decline? Put the pipe down.
And guys who buy billions of foreclosed properties?
While we all know the market is still coming down everything you said is just not credible by any measure.

RE Investor - Puleeze, you're guaranteeing a 50% increase in 3 years in a declining market? Your statements are even less credible than ajax.

And ted - We are the ones who didn't buy into the hype. So here's a big F you to you from CA.

[let it burn]

puckhead,

itoldyu2cashout's rhetoric might be a little overheated, but his basic point is right: prices are still very high (especially here in socal) and interest rates are incredibly low... there's nowhere for things to go except for interest rates to start going up again, sooner or later, and this will exert downward pressure on prices.

itoldyu2cashout is right, if you're a seller (like American Home Mortgage) who really wants to sell then NOW is the best time to sell. Time is of the essence - cut those prices NOW, otherwise you'll be cutting them even more tomorrow.

[That Hideous Strength]

Folks posting here keep writing about "stupidity" and "greed". Those are just judgemental words that banks and entites like AHM take with a grain of sand. This issue needs to be addressed with Laws....like Sarbanes-Oxley Title VIII.

[P J Evans]

What I've seen before is that the bank is figuring in the cost of the cosmetic work (painting and cleaning) to make the house look good to buyers, especially if it's been empty for a while. If you tell the bank you'll do that at your expense, they can, at least sometimes, be talked into taking that money off the sale price. It can save you ten or twenty thousand dollars right there, if you're willing to go that route.

[Jet]

The answer to this solution is simple:

Let the lender be bankcrupt so this house goes really cheap. Probably like 300K(even less since this is LR and there's a lot of foreclosures close to this area). Let it be a foreclosure ghost town. That will make it even cheaper.

That's how home prices will go down and this misery about houses being overpriced will be balanced.

[wha]

RE Investor, can I ask how old you are? How long have you been in RE?

I'll assume that you haven't been in the business long enough and have only known the rising prices of real estate during this bubble, and that's why you think it'll appreciate another 50% in three years. Absolutely ridiculous. What do you suppose is going to drive all that appreciation??? The bubble days are over, if you haven't noticed.

Foolishness all around indeed, including you.

[SoCalRealEstateNews.com]

Hmm--just this morning we put up a post about buying foreclosures in general and one foreclosure auction experience we had back during the 1990s crash.

It was the opposite problem then--people overpaying, but then falling out during the closing process. There's nothing like those worked-up crowds & those dudes flown in from
Texas in tuxedos to get them going, but every home we tracked went for more than comparable homes were listed for in the same neighborhood.

That could mean this crash is going to get a lot worse, but based on reports I've seen from other, packed-out auctions, I think it's just a case of this band doesn't have it's act together yet. We saw the same problem when short sales were just coming back, and plenty of banks negotiated themselves right out of millions of dollars 12 months ago.