A house in the hills for $400K? Foreclosure and opportunity in Highland Park

Last week I published the the stories of three recent home-buyers, and one of them was brave enough (masochistic enough?) to offer a more detailed account of her decision to ignore the  comments on this blog and buy a house. Milla Goldenberg, who writes the blog Milla Times, on finding a home in L.A. for $400,000:

"Originally, I looked at Silver Lake but the fixers there were selling in the fives, so I moved my target east to Highland Park, where prices seemed more manageable.

"I drove around the neighborhood every weekend for about a month, even at night, to get the lay of the land. I had a friend who bought there a few years back, and I was always impressed that her street housed a Buddhist temple, a Baptist church and a Jewish synagogue, and was one block from the Gold Line. Sure, I noticed the graffiti and homeys with tattoos on their necks, but I saw plenty of that all over the city and wasn’t particularly afraid of mingling with the working class. Tons of cool bars, boutiques, coffee shops and galleries peppered York and Figueroa, and the hillside houses remained shockingly affordable. I also noticed that the area’s first Starbucks was being built and figured that if I got in after the first Starbucks but before the first yoga studio, I would be set.

"The landscape was filled with foreclosures, many of which were trashed by their previous owners. I passed on all these dumps and held out hope that I could find something more to my liking. I did, in fact, find many houses to my liking and thought I could score them easily at a bargain price. But something odd would always happen: I was outbid.

"Months of reading L.A. Land convinced me there were no other buyers out there, so I was shocked to discover that I had competition."

"Granted, it was nothing like the competition during peak, but I quickly realized I was up against other first-timers like me looking to score a deal. And we were looking at the same houses — the good houses — because the good houses, when priced right, were moving, and still relatively quickly. Many times, I saw a seemingly good house appear on the MLS for just a few days before being snatched up.

"After about two months of looking, I found my good house: a foreclosed property in the hills on the Highland Park-Eagle Rock border, a 3/1 on a 5,300 sq ft lot, detached garage, partially built basement, 1,000 sq ft inside, a sizable deck and amazing view into the valley below. The house had been on the market for a week before I made my bid. Price tag was $449,000. I checked the comps for the block, which were mostly in the fives. I checked the public records on the house and found out it had been occupied by the same family for 10 years, who refinanced twice during the boom, pulling out about $540K. They were in foreclosure a year later.

"I negotiated a purchase price of $410K, so I went over budget a bit, but not in a way that wrecked me financially.  I understand how the naysayers and doomsdayers can cry from their armchairs that the sky is falling, but as someone who actually went out there, I know things aren’t as dire as people think — unless, of course, you’re a speculator only concerned about your bottom line, which I am not. I also understand how a pack mentality and the bottomless echo chamber of the Internet can cause people to resist the idea that now really is a good time to buy. But it is a good time to buy.

"I do know that prices have already fallen 20% from their peak and I thank my lucky stars that I didn’t buy at peak. Did I buy at trough? Probably not, but that’s not my primary concern, because when we put market timing aside, owning a home is always a good thing. So I’m not worried about short-term depreciation. I found a great house in the hills that I know will sell when the time comes. I have a roof over my head, a big yard for my dogs to play in, a tax shelter that will keep me smiling at tax time, more space and storage than I’ve ever had in any apartment, no landlord to bother me and a killer view that soothes me after a long day. I couldn’t be happier with my purchase. I have no regrets now and I’ll bet you my house that I won’t have any in the future."

Thanks, Milla.
Comments? Thoughts? Be respectful, please. E-mail story tips to peter.viles@latimes.com

Comments

[candice]

I've been looking in a different neighborhood (valley) and my close friend is looking in the South Bay and we've noticed the same thing. When a house is priced right, it disappears very very quickly. A lot of people on this blog say, prices need to reach 2004, 2003, 200-whatever prices, I agree. And if you're looking at actual houses, not median trends, those prices are out there. And when it pops up, it pops away instantly.
Good catch!

[tom]

i would like to know how much down payment you put down and also your monthly payments. You must have an above average salary.

[Cec]

So inspiring! I'm dealing with the same naysayers but I've pushed on am (hopefully) on the verge of purchasing my first home in Long Beach. Thanks for sharing!

[storyteller]

WAMU IS OUT OF WHOLESALE LENDING

wow.

[JohnnyB]

"Months of reading LA Land convinced me there were no other buyers out there, so I was shocked to discover that I had competition."

Interesting... my conclusion from months of the same reading is that the greater fools die hard. They ARE out there, some with blinders on, others oblivious to the real depth of the situation, others who rely on RE agents "wisdom", others moving here unawares of the accelerating declines, others feeling they have no choice, etc, etc...

"I understand how the naysayers and doomsdayers can cry from their armchairs that the sky is falling, but as someone who actually went out there, I know things aren’t as dire as people think."

The “sky is falling crowd” are loud but on the fringe (always will be). The "it's not as bad as people think" crowd are even louder and in the mainstream… especially in the media and through folks with a vested interest - and there are many – indirectly and directly vested. Most intelligent folks try to take a reasoned, fact-based approach to assessing the situation. This is crucial when spending on one's most expensive life purchase. It's not "as dire" if one is relatively better off and doesn't mind being in a negative equity situation.

"…because when we put market timing aside, owning a home is always a good thing."

When we put anecdotes aside, one don't own anything until one starts paying off principle and building equity. With prices declining as they currently are, one can be in negative equity territory for potentially many years to come. That’s not REAL ownership, it’s debt servitude… until that reverses and one is ‘back in black’.

“I found a great house in the hills… roof over my head… big yard… tax shelter… more space”… etc.

RIGHT ON! That’s why owning a home is called the American Dream!

I would just add that buying a foreclosed home is not as simple and easy as buying a home that is not in foreclosure. Without proper attention to detail, one could end up owing on and being lawfully obligated to pay previous debt/liens.

[E]

My God!

Respectful...hmmm.

Let's see...we have just about every NAR talking point from a place for the dogs, tax shelter...I mean really...this entry is like Clif notes for every load of BS that Realtors have been feeding people on every Realtor Blog across the nation.

It would take me hours to pick this post apart sentence by sentence but any rational reader will already see right through all the puffery.

I personally never associated graffiti and "homeys with tattoos" with the working class...more like gangs.

Keep us posted on all these people Peter...I'm loving it!

Economic Darwinism at its finest!

ohhh....yeah...and could you do a post on that RE agent that posted in the Krugman thread! Better yet...maybe bubbletracker should do it being that he's in "the OC"!

[Giacomo]

Yeah, I don't know, maybe it's character-building to live in gang-territory. Don't wear red or blue, don't make eye-contact, and you'll be fine. 400K. Sweet.

[Uncle Billy Climbs Mont Pelerin]

On the one hand, this is the feel-good movie of the year. On the other, though, it leaves a bad taste in my mouth because:

a) Though we don't know the particulars of her income, it seems as though she really stretched to get this.

b) If she did a straight portfolio bank loan, with all the risk concentrated with the bank that gave her the loan, no harm no foul -- if she defaults, it's THEIR loss. But if she's doing all sorts of government guaranteed loans, she's still gambling with OUR tax dollars.

which leads me to...

c) I do NOT want to play insurer for any more Milla's!

[Ann]

"I do know that prices have already fallen 20% from their peak and I thank my lucky stars that I didn’t buy at peak.

__________------

$540 the last time they refied to $410 now? Better work on your arthimetic. That is 24% off the last known top valuation for that house.

RE: Mortgage interest deduction. Hope you do understand that you do NOT get to deduct all the interest. Formula goes like this:

Amount of interest paid (which goes down every year) x tax bracket rate.

Say your mortgage is $389,500 (having put down 5%.)

At 30 years,6% interest. that would be around $25,000 in interest the 1st year.

Assuming your tax bracket is 28% , multiply $25,000 x 28%. (That gives you the amount you can deduct)

You get to deduct $8048.

Your tax savings is $2253 for the year. (What is saved is how much you would have paid in taxes on the amount that you deducted.)

Thaat means you are saving $187 in taxes each month and spending around $2953 or more in PITI principal, interest, taxes and insurance.) It you didn't put down 20% you are also paying PMI.

Balance for the month = $2953 - 187 = $2766. (And the $187 a month will be devoured the first time you have to call the roofer, the plumber, the heating/cooling guy, the electrician......)

So, what do houses like yours rent for on your street?

And that is really what it comes down to as to whether it is a good or bad decision.

If you are paying more than what it would bring in rent but are staying put for 10,15 or more years , then it should eventually even out.

If you think you might move in 3-5 years and are paying more than it would bring in rent, then it is a very bad decision. (And if that is true, then you may have 'read' but you didn't comprehend or check the numbers or find the information to be able to tell if it rented for less.)

[left of lefty]

milla and others bought at the right time. as milla noted, competition is heating up. yes, there are still lots of inventory out there, but most are not priced right and will never sell at their current list. of the ones that are priced right, the difference between ask and contract prices is diminishing. we're quickly converging at a price point where sellers are willing to sell and buyers can afford to buy.

i believe both sales and prices will go up this spring and summer relative to jan/feb, as per seasonal trends. the question now is whether prices will drop again after the summer season. if it does, it will be considered 'normal'. if it does not, then that's definitely a sign that we've reached and passed the bottom.

however, those who have yet to buy have not missed their chance. prices probably will be up and down a little for at least the next year or so. i doubt we'll see any major rises or drops for the next couple of years.

[TakeFive]

I'm not sure if asking questions makes me one of the naysayers Milla is referring to, but here goes again:

Something about this transaction doesn't sound right, or at least some of the pieces of the story are missing that explain how this transaction went through.

As previously written:

As Milla stated, she went in as Low Income. Income range for low income is 54,576 to 62,762.

Using the loan calculator at the link Milla posted for this program shows low income with zero debt only qualifies for a 250k to 264k loan.

So where did the extra 146 ~ 160k come from? Did Milla make this large of a down payment? Did they use a different loan program? Are the guidelines different than those stated at the link? Does Milla actually have a much larger income than the stated limits, or was there a co-borrower?

I think these are fair questions about how Milla was able to purchase in what is still a very expensive market with what appears to be a nominal income. Maybe there is some exception buried in one of the documents. Perhaps Milla can give us some clarification.

Links Milla provided:

http://www.calhfa.ca.gov/homebuyer/

http://lahd.lacity.org/HomeBuyers/GeneralInformation/
tabid/97/Default.aspx

[Hula Girl]

Hey Milla - good luck and enjoy your purchase. There's something to be said for zigging when everyone else is zagging. I bought a fixer in Los Feliz the day after 9-11.

Friends and family thought it was time for electro convulsive therapy. Was I scared I made a bad decision? Hell, yeah. But it seemed like a good thing to do when everyone else was panicking.

Unfortunately I sold in 2004, pre-peak, but I still did alright,
You will too. And your dogs will thank you for it,

[GDC]

Ann,

You don't know what you're talking about. If you paid $20k in interest for the year (not principal), you can deduct that whole amount. If your marginal rate is 28%, then you saved $5,600 in taxes that year.

[peter m]

http://www.businessweek.com/magazine/content/
08_15/b4079065602019.htm?chan=top+news_top+
news+index_top+story

“The crowd of 2,000 people who showed up for a big sale of foreclosed real estate on Mar. 16 at the Los Angeles Convention Center. ....For folks used to bubble pricing, there were some surprisingly deep discounts. A four-bedroom house in Palm Springs that had previously sold for $1.2 million went for $625,000. A two-bedroom cottage in Los Angeles’ trendy Silver Lake neighborhood that had traded hands two years ago for $887,000 got picked up for $285,000.....Edwin Beeks, retired from the U.S. Navy after being wounded in Iraq, picked up a four-bedroom ranch house in Lancaster, Calif., with a bid of $95,000. The previous owner paid $255,000 in 2005, borrowing 95% of the purchase price from a subprime lender.”

Sliver lake at $285.000?. WTF!! Weren't 2-1 100 yr old SL fixers going for a million less than 2 years ago?

Large parts of the inner LA dwtm inner ring areas encompassing such beauty spots as Pico-union, westlake, rampart, China town, jefferson park, boyle hights, lincoln hts, already in advanced decay will become gutted cesspool areas which will in turn infect the second layer ring areas such as echo park, SL, Glassel, Atwater, highland park, USC district, koreatown, ect, as a peach rotting from the inside. This is all Inevitable as the recession will become very nasty and cities/states will cut back on services due to budget shortfalls, leading to reverse gentrification of areas on the cusp.

The politician-hacks and the fed are making extreme noises about bailing out specu-vestors and 'saving' foreclosed hoods but they might as well be trying to put out a house fire with with a squirt gun.

[JK]

"Sure, I noticed the graffiti and homeys with tattoos on their necks, but I saw plenty of that all over the city and wasn’t particularly afraid of mingling with the working class."

Peter told us to be respectful and I plan to do so, but... a "homey" with tattoos and a neighborhood full of graffiti in Highland Park is not a working class neighborhood, it is a barrio full of gang members. For $400K, it's not my idea of a "good" house but to each his own.

Go ahead and live your dreams though. Gentrification has to start with a few families at a time, thanks for being one of the first.. Call me when the graffiti has been cleaned up and English speaking families start moving there again.

[sfvrealestate]

Milla, as I said before, enjoy your purchase. NOBODY, including the posters on this blog, knows the future.

[someday the ants will eat grasshoppers]

Hi Ann,

I hope you're wrong and I'm not, or the dream of homeownership just got further away.

I believe you can deduct all of the interest, and what you save is your rate times the loan balance for that year(generally, if it is under $1M).

So you're right about the $8048, but that is the money the borrower would save, not what she would deduct. It's a big difference in her case, but I'm not making a judgement on whether that means it was a good or bad decision on her part--but it's not as bad as you think from a tax perspective.

http://www.irs.gov/publications/p936/index.html

[mommy]

You go, Milla!
Personally, I would be a little hesitant about homies & tattoos because, well, been there & done that... I like it a little more quiet. But, each to his/her own!!
Hubby and I will raise our glass to you when we close on our house next month... good luck, and thanks for sharing.

[Yev]

The cheerleaders on this thread sound the same as the cheerleaders during dot.com. Of course all the same cheerleaders ignore the naysayers who make sense via math, just like fundamentals were ignored during dot.com. Math makes sense but of course in LA good amount of people live in la-la-land. What's missing is the financial picture. The proverbial bagholders will keep up their hopes and listen to the cheerleaders, while their purchases dump in value. Enjoy, I'll wait, trend is your friend, and it ain't up.

[mommy]

oh -- and after looking at milla's blog, i'm left puzzling over why her foreclosure and my foreclosure look the same on the inside! mismatched laminate, crazy pink, purple, and green walls... we'll be doing some demo work, too.
love the view!!

[Bunja!]

I know that neighborhood very well; as I have lived for the past 10 years less than one mile from there, in Mount Washington. Your guest blogger's naivete is alarming at best!

The "GANG" graffiti and "homeys with tattoos on their necks" are not disaffected youth or cool homeys, but rather serious Avenues Gang Members and Mexican mafia, that would think nothing of raping, robbing and murdering her no matter how "cool" or "nice" she is to them!

That specific area is so dangerous that I, having worked on several homicide investigations, DO NOT DRIVE THROUGH there at all.

I pray, that she does not overestimate her immunity and get close to, invite into her home, or hang out with her new "homeys."

This is coming from a single woman who has worked closely with law enforcement to clean up that area and has lived here for 10+ years.

However; it is her life and if she feels strongly that she can stop a bullet or a gang rape, then by all means - ENJOY!

I hope this scares her into caution and out of that ridiculously naive "homeys with tattoos" thing!

[amused]

Encouraging story. Market may keep tanking, but if you are not in it for the short term and don't mess around with risky financing, does not really matter, other than psychologically, because you have already committed to spending what you are spending. I am always amazed by the self-annointed tax experts on these blogs who could not be any more off. Please don't listen to Ann. You do not need to tax effect the interest to arrive at your deduction (Internal Revenue Code section 163(h)(3)). The tax-effected number equals the cash savings in tax (i.e. the estimated 8,048). Also, you get to deduct the real estate tax of about $4.25k (cash savings equals that amount times marginal tax rate; unless you are in AMT). Plus you will get to itemize state income taxes for the first time, along with any charitable contributions, etc, etc. So, your net cash outflow is significantly lower than what Ann calculated and you will accumulate principal (yes, in principle that is the correct spelling) paydowns along with the eventual appreciation of the property...all while enjoying the intangible of home ownership. Ann, thank you for paying more taxes than you need to...that is if you own a home.

[MillaStalker]

According to previous posts and Milla's blog, she took out a low income program loan. She received her down payment from the Bank of Mom and Dad. She does not have a stable job.

So the reader's question is, how can she afford this house? HMMMMMMMMM

[pathetic]

Ann, I don't think that's right. Tax savings on $25k in interest expense at 28% (assuming the marginal rate stays constant for the full amount) would be $25k * 28% = $7k. Interest is fully deductible, no factor is applied prior to deducting on Schedule A with the exception of excess income phase out which doesn't appear to apply here.

Not sure how you came up with $8,048 deduction number. $25k * 28% is $7k.

[Sean Burke]

Ann, I think your math is suspect.

If she itemizes deductions, the $25K in interest paid will reduce her income by $25K. At a 28% marginal tax rate, her federal tax savings from the interest deduction will be ~$8K, and her state savings from the interest deduction will be ~$2.5K.

Additional savings for the property tax deduction as well.