The DeLeon Insight - May 2016 Newsletter by DeLeon Realty

The DeLeon Insight Silicon Valley Real Estate Newsletter Local Specialization

Global Reach

Integrated Approach

_____________ Capital Gains

M ay 2016

& 1031 Exchanges

_____________

• Supply-Side Economics in Action

The DeLeon Update: Market Trends

Average Price/Square Foot 2015 & 2016

01/2015 - 4/30/2015

01/2016 - 05/03/2016

Average price per square foot for single-family homes from 01/2016 to 05/03/2016 compared to a similar period in 2015.

Average Sales Price 2015 & 2016

01/2015 - 4/30/2015

01/2016 - 05/03/2016

Average sales price for single-family homes from 01/2016 to 05/03/2016 compared to a similar period in 2015. (Note that this is a small sample size due to the time of year.) *Data gathered from the Multiple Listing Service on 05/03/2016

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Supply-Side Economics in Action How the lack of housing supply will prevent price declines in Bay Area housing By: Ken DeLeon, Esq. DeLeon Founder

fter seeing recent volatility and declines in the stock market, some are questioning whether a seven-year cycle of appreciation in Silicon Valley housing is ending and whether we are headed into a period of depreciation. These arguments have focused on the potential decline in demand as tech companies experience less growth, and even some layoffs, as the world economy slows down. While I do not forecast a large drop in demand since larger tech companies like Google and Facebook are still doing well and hiring, the real key to the equation is not housing demand. Instead, the true factor is housing supply—more accurately, the lack of housing supply that is currently driving the housing market. For most economic goods, the higher the price goes, the more supply is provided until an equilibrium is reached and prices eventually peak and decline. However, Silicon Valley housing has paradoxically seen a decrease in supply as prices have risen. In fact, empirical data illustrates that, generally, the larger the increase in price, the greater the decrease in supply. The four local cities of Los Altos, Menlo Park, Mountain View, and Palo Alto are examples of cities that have experienced both high appreciation and declining inventory since 2012 (see tables pulled from the MLS, recently). Taxes, particularly increased capital gains taxes and subsidized property taxes, are the main cause of this declining inventory and why the supply is declining most acutely in the most rapidly appreciating markets. In 2013,

capital gains taxes went up on both federal and state levels (in California, the top bracket went from a combined 24.3 percent to 37.1 percent) and this disincentive discouraged sellers from selling. Reflecting the strong effect this had upon housing, the number of sales in Palo Alto dropped from 556 in 2012 to 451 in 2013, a drop of nearly 19 percent in just one year. The rise in prices also makes the protections offered by Proposition 13 more valuable, another reason sellers are less inclined to move. With prices increasing by double-digit appreciation in these four local cities for all of the years in this timeframe, the two-percent cap on increasing property taxes due to Proposition 13 encourages owners to avoid moving, thereby losing their low property tax basis. Any projected drop in housing demand due to the softening economy seems dwarfed by this trend of declining supply, which shows no signs of subsiding short of lowering capital gains tax rates. A fundamental tenet of supply-side economics is that lowering tax rates may actually generate more sales, and therefore more tax revenue, than otherwise expected as the lower tax burden will incentivize more sellers to

sell. It appears that only a reduction in capital gains will reverse this trend of declining supply, and this is unlikely to occur. If most polls are accurate and Hillary Clinton wins this year’s election, the federal tax rate on capital gains will likely go up another four percentage points, further demotivating sellers from selling if their appreciation is over the $500,000 capital gains exemption allowed for primary residences. Unless savvy sellers utilize the estateplanning tools we mention in other articles in this newsletter, such as the 1031 exchange to avoid capital gains, or Proposition 60 to carry low property tax bases, this continued trend of low supply is projected to continue. This has historically resulted in higher prices, creating a feedback loop of even lower future supply and even higher prices. While news headlines may focus on the possibility of a drop in demand and therefore housing prices, the larger issue—and one that will mitigate the lessening demand—is the large, continuing drop in supply that will buoyantly propel Silicon Valley housing through the turbulence in the world economy.

- DeLeon Insight May 2016 3

334 Poe Street, Palo Alto

Executive Residence in Downtown Palo Alto

Enjoying easy walkability to University Avenue, this luxurious 6 bedroom, 6 bathroom home of 4,858 sq. ft. (per county) occupies a peaceful property of 9,000 sq. ft. (per county) and is designed for both indoor and outdoor entertaining. The exquisitely crafted interior offers elegant woodwork, four fireplaces, and sophisticated living spaces, plus a flexible lower level with a kitchenette, while the unforgettable backyard retreat boasts an observatory. Parks, restaurants, shops, and fine entertainment are all within walking distance, and incredible schools are easily accessible. For video tour & more photos, please visit:

www.334Poe.com Offered at $5,988,000

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Lighting Trends for 2016 By: Lauryn Varnum Interior Designer

016 brings a host of new lighting trends to incorporate into your home’s décor. Design schemes have lately been characterized by neutral palettes with simplistic, transitional light fixtures. This is quickly changing with 2016’s bold wave of trends for rejuvenating your domestic spaces. Bathrooms can easily be updated by exchanging a tired, Hollywood vanity light with a frosted-glass sconce. Your living room can be transformed by swapping a new, bronze cage chandelier for an old, khaki drum shade. A new light fixture will help revitalize any space, as lighting is moving to the forefront as focal pieces. Opulent pieces are making a comeback. An easy way to make a room feel grander is with an eye-catching, luxurious fixture. Rather than settling for the clean, understated lines of a simple pendant or a drum shade, instead opt for a regal chandelier. You don’t have to limit these fixtures to your formal dining room, either; elaborate fixtures can help transform your master suite or elevate your foyer. Really, any room in your home can receive an upgrade from a chandelier with artistic flair. Statement pieces are also trending. Neutral color palettes can help make the fixture a focal point within a room. Whether it’s the post-modern look of an Eichler orb or an eye-catching cage fixture complete with stylized Edison bulbs, statement lighting can give an entire room its own personality. While greige tones can still provide an appealing look for many people, an artisancrafted, glass farmhouse light will leave a lasting impression on all who view your space. Move over, brushed nickel! Varied metals are returning to fixtures. Copper, bronze, gold, and even brass give new life to lighting. A burnished bronze pendant elevates the transitional feel of neutral colors, giving the impression of expensiveness. A galvanized steel pendant can change a room’s soft, feminine feel to appeal to a broader audience. These pieces can also modernize a space by using geometric lines to combine sharp

angles with the warmth of gold tones. Uniquely shaped fixtures are replacing standard pendants in more and more homes. Try out a brass trapezoid with a large, glass globe, or a claw-footed floor lamp. This can help dictate design choices throughout the remainder of your room while helping the space feel as if it has its own customized scheme. Visually, transitional choices seem to blend together, while interestingly shaped light options will give a space its own personality. Finally, it’s time to scale up on the size of light fixtures. Instead of multiple small pieces, opt for a large sconce or a chandelier. An oversized pendant or a drum fixture draws the eye and eliminates the need for excessive décor, which can make a room feel cluttered. While you don’t want a fixture to overwhelm

or dwarf a room, a larger fixture will stand on its own as a focal point that will translate through many design changes. It will help to ground the space and command the attention of anyone viewing the area. A light of this magnitude will wow visitors; it will remain a talking-point and easily differentiate your home from all others. These new trends are easy to incorporate into a design scheme and shouldn’t intimidate anyone looking for a simple way to update a room. Explore options that will breathe new life into your décor while appealing to diverse tastes. Don’t be afraid to install an oversized pendant over your breakfast nook, or a French Country-inspired chandelier in your bedroom. Have fun with 2016’s bold new lighting trends, and get ready to revitalize your space!

- DeLeon Insight May 2016 5

Proper Advice About Propositions 60 and 90 Can Save Buyers Thousands Annually By: Alex Seroff, J.D. Assistant Director of Sales and Mountain View Buyer Specialist

eLeon Realty prides itself foremost on ensuring clients purchase the right property at the lowest possible price. However, watching out for the best interests of clients in all the numerous peripheral issues that are associated with property acquisition is one of the many ways that DeLeon Realty stands above the rest of the industry. Clients of DeLeon Realty benefit from agents and staff with a wide variety of backgrounds, meaning that if an issue arises, most likely someone in the firm has experienced the issue before and knows how to best advise the client. Property taxes are no exception. With a legal background and having worked at the county of San Mateo as an appraiser for property tax assessment purposes, the author is uniquely positioned to advise clients of the buyer specialist team in property taxrelated issues. Several common questions pertain to the use of various propositions passed by the electorate to prevent the reassessment of properties upon transfers and the increase of taxes levied on the property. Proposition 60 and Proposition 90 are most often of interest to both buyers and sellers. Proposition 60 allows a person age 55 or older to transfer the assessed value of a principal residence at the date of sale to another property within the same county to be used as the replacement principal residence. The intent is to allow older citizens to downsize without a drastic increase in property taxes, assuming

they have owned their principal residence for some time and are benefitting from a low assessed value pursuant to Proposition 13. However, multiple conditions must be met, and unadvised downsizers may end up ineligible if they do not have proper advice on the avoidance of potential pitfalls. For example, downsizing clients may have significant cash reserves that they wish to use to buy in a superior location relative to their principal residence and, as a result, would need to spend more than the sales price of their principal residence to acquire their new, smaller, yet better located home. Clients may take this route, knowing only of the age requirement. However, DeLeon Realty is well aware of an additional requirement that the replacement home be of equal or lesser value than the principal residence being replaced. This means downsizing clients must consider that, regardless of how much equity they have accumulated over the years, they will not be eligible to avoid reassessment if they decide to spend more than the sales price of their principal residence to make an upgrade in location. There are minor

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exceptions that can be discussed with clients at private consultations. Proposition 90 is designed to accomplish the same thing as Proposition 60. However, while Proposition 60 permits this home transfer within a county, Proposition 90 addresses the issue of what happens if clients wish to transfer their assessed value to a property in a different county than their principal residence. Proposition 90 is optional for counties, and those that elect to participate will allow sellers from a different county to transfer the assessed value of the property outside of the county into their county. Presently, ten counties participate, including San Mateo and Santa Clara counties. This means that they are quite attractive to those over 55 interested in relocating. Proposition 60 and Proposition 90 are only two of the many property tax issues that DeLeon Realty is prepared to provide advice upon. There are many other aspects of property taxation that are important to consider. Please reach out to the DeLeon Team with any questions about property taxes and your ability to reduce them.

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- DeLeon Insight May 2016 7

Capital Gains and 1031 Exchanges By: Michael Repka, J.D., LL.M (Taxation) DeLeon CEO/Managing Broker “In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin

hough cheating death is a fool’s game, strategically and legally avoiding taxes is a game for winners. While most Silicon Valley sellers inevitably accept the large tax bills they will pay when they choose to sell, a savvy seller, coupled with a real estate broker willing and able to give competent tax advice, can avoid this fate. There are great tax deductions, or deferral techniques, the federal government allows. Namely, these are the Section 121 $500,000 capital gains exclusion that married homeowners receive for their primary residence ($250,000 if single), the 1031 taxdeferred exchange for investment property, and the installment sale treatment under IRC Section 453.

Having traveled the world as real estate nerds, Ken and I have researched the tax structures and incentives of other countries and found that no country provides as many tax subsidies for homeownership as America. Yet few people fully understand and utilize the two major tax exemptions for U.S. homeownership, and even fewer know these two benefits can be combined to fully avoid capital gains. As you likely know, the first $500,000 in capital gains profit that a married couple has on a primary residence is exempt from any California or federal taxes. While this is exceptional and eliminates all tax concerns in almost all states, this exemption can be a drop in the bucket in prime Silicon Valley neighborhoods. This may initially prevent some owners from selling, but all currentyear capital gains can be eliminated by combining this exemption with the strategic use of the 1031 tax-deferred exchange. The 1031 tax-deferred exchange is a way for owners to sell their investment property,

purchase another of equal or higher value, and then defer paying any capital gains. The concept is that, since the owners never actualized the gain, they just transferred their gains into another investment. Therefore, they should not have to pay capital gains on that new purchase. There can be a series of exchanges, and upon one’s demise these properties will be reassessed at market value and your heirs can then sell them without paying any capital gains. While most people likely know of the primary home exemption and perhaps may have heard of the tax-deferred exchange, few sellers know these two great tax advantages can be combined to avoid paying any capital gains tax. Avoiding capital gains on your home may save you hundreds of thousands—perhaps even millions—and may make selling your home more attractive than you realized. To be eligible for your primary home exemption, you must live in your home for two of the last five years. This means you

can rent your home for up to three years and still get the $500,000 exemption. Once you rent your home for a year or more, it then becomes an investment property and thus eligible for the tax-deferred exchange. This means there is a window of time when your home is both your primary residence as well as an investment property. Thus, if you sell during that window, you can take $500,000 from your sales proceeds, invest the rest back into an investment property, and not pay a penny in capital gains! To illustrate the savings, let’s say a couple of Atherton or North Palo Alto residents bought a home for $100,000 thirty years ago that is now worth $5 million. If this couple does the typical sale while living there or right after moving out, they have their $100,000 basis and their $500,000 exemption, but will pay capital gains on the remaining $4.4 million. With the top bracket of capital gains for California residents being 37.1 percent, these poor sellers will have to pay that percentage on their gain—a staggering $1,632,400—to the federal and state governments. Alternatively, if they choose to

strategically rent the home for a year before moving out, they can take this remaining $4.4 million and invest it in any real estate option in any state. For example, the sellers may want cash-flow, so they buy a large apartment complex with a live-in manager (so no work is required on their end) and get eight percent returns in areas with relatively high rental rates, such as Florida or Texas. Or, perhaps they seek less cash-flow and greater appreciation, and instead buy several duplexes in Mountain View and get good cash-flow while still tapping into Silicon Valley appreciation. The initial rental returns of local real estate is four percent (for example, a $5 million apartment complex should get the owner $200,000 per year for a four percent rate of return). This is quite favorable when you factor that rents have been going up by 10 percent a year and appreciation is projected for these multi-family properties. Even with capital gains savings sometimes into the millions, most sellers do not fully utilize this savvy estate-planning tool. This is likely because most sellers, and even most real estate agents, are not fully aware of how

to successfully navigate the requirements of the 1031 exchange and tax laws. However, if you speak to a real estate attorney or if your Realtor® is an attorney, you can be advised on how to strategically utilize this amazing tax exemption. Since my second law degree is in tax law, we can advise clients on all the nuances of the exchange and how not to have it disqualified. Additionally, we also assist our clients in facilitating smooth moves out of their homes and in identifying quality tenants. Seeking to provide our clients with fullservice, DeLeon Realty advises its clients on all legal and tax implications of any tax laws or ordinances. This is true whether it involves avoiding capital gains or carrying your low Proposition 13 tax basis with you if you are over 55 and meet other requirements. By properly utilizing these low tax exemptions, you can get closer to passing on your full $5.45 million tax-free to your heirs. In the end, it does not matter how much money you make or sell your home for; it is how much you net to enjoy and pass on to your heirs that matters.

- DeLeon Insight May 2016 9

The Hidden Costs - and Opportunities - of Commuting By: Aaron Hsu Sunnyvale Specialist and Data Analyst

ommuting. Everyone detests it; in fact, people hate commuting so much that it ranks in studies as the most unpleasant common activity. Nevertheless, people remain stuck on the traffic issue, figuratively and literally, with the average American’s commute recently reaching a historic high of over 50 minutes per day. The plight of commuters is especially dire in the Bay Area. In a recent study, the area ranked as having the fifth-worst commute in the nation. Moreover, traffic has only gotten worse. A 2015 study found that traffic rose 18 percent in 2013, a 15-year record for the Bay Area. Outstanding employment growth would certainly appear to have a hand in this; the San Jose-Sunnyvale-Santa Clara metropolitan area claimed the prize in 2014 for best employment growth in the nation, at 5.2 percent. The costs of commuting— social, physical, and emotional— are well-documented in numerous facets of everyday life. Swedish researchers have discovered that having at least one partner commuting more than 45 minutes a day increases a couple’s risk of divorce by 40 percent. In addition, an NIH study found that every hour spent commuting is associated with a 22-minute decrease in time spent with a spouse and an 18-minute decrease in time spent with children. Commuting takes a physical and an emotional toll as well. Every hour spent commuting is associated with a 13-minute reduction in sleep time, and the number of miles traveled by vehicle is more strongly correlated with obesity than any other factor, even physical activity. Long commutes are also associated with higher levels of anxiety, blood sugar, cholesterol, blood pressure, and depression. Finally, every 10 additional minutes spent on

commuting decreases social connections—a key determinant of happiness and fulfillment—by 10 percent. In fact, the deleterious effects of longer commutes are quantifiable. Economists have calculated that every additional hour on the road would need to be accompanied by a salary increase of 40 percent to compensate for the additional time on the road and associated costs. Few commuters, however, make 40 percent more than their noncommuting colleagues, demonstrating the

ubiquity of underestimating the pain of commuting. Economists find an analogous effect in real estate. Studies have shown that people tend to undervalue the cost of commuting and instead overvalue having a large house. Many homebuyers have a choice of either buying a larger house while enduring a longer commute or selecting a smaller home closer to work. For example, the same $700,000 that buys a 900-square-foot

condo in Mountain View could purchase a 4,000-square-foot single-family house in Antioch. However, this begs the question: is it worth owning a large house that seldom gets to be enjoyed? Or is it better to enjoy a smaller home with more family time? The benefits of purchasing homes closer to work are not limited to the physical, lifestyle, and emotional benefits of shorter commutes. Cities closer to major employment hubs have seen much faster appreciation than cities farther away (see table), reflecting the increased demand for living closer to work. Real estate in these cities is also much more resilient to economic downturns. Consider the comparison between Mountain View condos and Antioch single-family homes over the same period of time (see chart). Thus, despite the plight of commuters, traffic congestion actually provides an opportunity to optimize not only real estate decisions, but also the rest of our lives. Homebuyers can obtain more value by prioritizing shorter commutes over larger homes that they will spend little time in. Therefore, they will not only tap into additional appreciation and equity opportunities offered by core areas, but also reap the rewards of better emotional and physical health and more family time—a true win-win opportunity. Talk to your DeLeon buyer specialist today about strategies to optimize both your lifestyle and your real estate choices, all at the same time.

177 South Gordon Way, Los Altos Captivating Residence Near Downtown Within walking distance of downtown Los Altos, this 5 bedroom, 5 bathroom home of 4,604 sq. ft. (per county) occupies a lot of 0.47 acres (per county) and offers two fireplaces, mahogany floors, and an office. Inviting spaces include a two-story living room and a fabulously remodeled kitchen. This solar-equipped home also provides a two-car garage and a mesmerizing backyard with a heated pool and spa. Downtown attractions and Los Altos High (API 895) are moments away (buyer to verify eligibility). For video tour & more photos, please visit:

www.177SouthGordon.com Offered at $5,248,000

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- DeLeon Insight May 2016 11

Romantic French Estate

185 Fair Oaks Lane, Atherton

Transport your guests to the south of France within this magnificent custom home of 5,494 sq. ft. (per plans) with 5 bedrooms and 5 full and 2 half bathrooms. Formal gardens join a garage with an additional guest suite with 1 bathroom on these gated grounds of 1.05 acres (per county). Only two years old, this breathtaking construction blends Old World charm with modern luxuries. Hickory floors, frieze molding, and intricate wall and ceiling treatments mingle with chandeliers, antique doors, and marble mantelpieces imported from France. The interior includes formal living and dining rooms, four fireplaces, a wine cellar, and a sumptuous kitchen. A family room opens to a columned loggia, while a gorgeous master suite awaits upstairs. The grounds include waterconserving landscaping, while a breezeway connects to a three-car garage and a spacious guest suite. This home features easy access to Holbrook-Palmer Park, Caltrain, and prestigious institutions like Sacred Heart and Menlo School, plus excellent schools like Encinal Elementary (API 930), Hillview Middle (API 950), and Menlo-Atherton High (buyer to verify eligibility). For video tour & more photos, please visit:

www.185FairOaks.com Offered at $7,788,000

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The Ripe Buyer’s Market of Los Altos Hills By: Ashley Kodweis Los Altos & Los Altos Hills Buyer Specialist

ffering award-winning schools, large estates, and beautiful views, Los Altos Hills is widely considered one of the best places to live in Silicon Valley. This sought-after community is even approaching celebrity status: Beyoncé rented a home in Los Altos Hills when she was in town for the Super Bowl, and several top tech executives live in the area. Perhaps one of the most outstanding selling-points is that the Hills maintains a rural and tranquil atmosphere due to the prohibition of commercial development. However, buying in the Hills is sometimes daunting. For instance, if local buyers are interested in building, considerations must be taken. As its name suggests, the Hills holds many properties located on sloped lots. Depending on the type of lot and the grade of the slope, homeowners must build in accordance with certain building restrictions. These require the minimum lot size to increase with the slope of the land. Additionally, because Los Altos Hills is dedicated to preserving its rural beauty, remodels and new constructions must meet specific criteria, such as boundary setbacks and fence height, and comply with open space easements (OSE). According to the Los Altos Hills General Plan, OSE are permanent easements that are meant to “protect and maintain those areas necessary to the integrity of natural resources and processes, with special emphasis on, but not limited to, the groundwater recharge and drainage system, open spaces vital for wildlife habitat, open spaces suitable for

agriculture, and other areas of major or unique ecological significance.” Although OSE may seem limiting, in most cases homeowners have plenty of freedom to build however they desire. Moreover, the local requirement that some land remain in its natural state guarantees that the Hills will maintain its beautiful scenery, therefore retaining its value. The Los Altos Hills market has also illustrated some fluctuation, further throwing buyers off balance. In 2015, low inventory and consequent high sales prices sped up the market. This led to an oversaturation of listings in early 2016 as sellers sought to capitalize on the previous year’s trends. For instance, there were only two new listings in Los Altos Hills in December 2015, per the Multiple Listings Service. As is typical in the winter, sellers waited to put their homes on the market, so during January and February 2016, a total of 23 local homes entered the market, resulting in a total of 57 active listings. This bombardment of the local market means that homes are now taking longer to sell, and when they do, they sell at more

competitive prices. In January 2016, the average home in the Hills took 95 days to sell, up significantly from 59 days in January 2015. Also in January 2016, the average home sold 6.7 percent below list price. This is notably lower than in January 2015, when the average home sold 3.2 percent lower than list price. At first glance, these statistics may put the current Los Altos Hills market in a weak light, yet this area is, on the contrary, an excellent opportunity for buyers. Reduced selling prices, increased days on the market, and inventory oversaturation have put buyers in a much better position to negotiate home sales prices. Additionally, homeowners will continue to see appreciation. Over the past two years, the average sales price for homes in Los Altos Hills has consistently increased from $3,129,398 in 2013 to $3,886,593 in 2015. Though recent market data appears to show that the local market has slowed down, local homes are continuing to appreciate in the long-term. Now is the perfect time for buyers to take advantage of the 2016 market’s slow beginnings.

- DeLeon Insight May 2016 13

5 Oak Forest Court Portola Valley

Private Woodland Paradise Offered at $3,288,000 Lofty ceilings and oversized picture windows emphasize the airy, welcoming floorplan of this 4 bedroom, 4.5 bath home of 4,210 sq. ft. (per county) on a wooded lot of approx. 1.52 acres (per county). Surrounded by acres of undevelopable common area to ensure privacy, this beautifully maintained home presents two fireplaces, spacious living areas designed for entertaining, an office, a must-see master bathroom, and an attached three-car garage. This nature-lover’s haven is a quick stroll from numerous trails and easily accesses local attractions.

www.5OakForest.com ®

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Pros and Cons of Different Types of Flooring By: Margie Fontanilla Interior Designer

he type of flooring in your home can make a significant difference in both its appearance and its value. As such, picking flooring materials is widely considered one of the most challenging tasks when designing a home’s interior. Learning about your options before making this decision can ensure you will enjoy your floors for years to come. After determining the intentions for each space, wise homeowners will carefully consider the characteristics of each option before making their selection. Carpet Carpet has long been a favorite go-to flooring material. It is soft, comfortable, and comes in a range of colors and patterns. As perhaps the most versatile flooring option, it is a very popular choice, and can also be very economical. The ability of carpet to express multiple patterns, colors, and textures makes it an ideal decorating option as the right choice can easily give a customized look. Carpet is also designed to lend warmth and dryness; it creates a sense of coziness while helping alleviate noise. It even acts as insulation by retaining warm air. A major disadvantage is that carpet retains stains easily. This can make it costly and

difficult to clean, especially when placed in high-traffic areas. Also, low-quality carpet will tend to wear out easily. Hardwood Hardwood flooring is known for its timeless beauty and durability. It will easily increase your home’s value while adding warmth and character, and its resilience will add years of longevity to your interior. If your home is going on the market, installing hardwood floors is an improvement that will actually be a selling-point. Another advantage is that, even if hardwood gets old and worn, it can be refinished to look practically new. Hardwood is also one of the more expensive options, so it is wise to carefully consider its placement. Using it in areas prone to moisture-exposure, like your kitchen or your foyer, has mixed blessings. Though it gives an inviting appearance, hardwood is sensitive to dampness, so warping may become a problem. It may even shrink or expand, depending on seasonal and temperature changes. Porcelain or Ceramic Tile Porcelain or ceramic tile may be the perfect solution for your home, especially for high-traffic areas. This type of flooring is extremely resilient, and even if it is damaged, a tile can be replaced fairly easily. It is very stain-resistant, and can also express a wide variety of colors, which is perfect for creating

a room’s personality. A disadvantage is that tiled floors tend to cause an echoing effect, making rooms noisy. Tiles can also become slippery when liquids are spilled on them, and their grout can attract stains and be difficult to clean. In addition, their hard, rigid properties make them not suitable for comfortable living areas. Laminate Commonly known as the cheap alternative to wood and tile, laminate is a very durable, flexible material that rarely fades. It is generally resistant to stains and water, is easy to clean, and is extremely inexpensive. It is also relatively easy to install; it can simply be glued or nailed over a subfloor. While laminate flooring has its advantages, it doesn’t generally appeal to homebuyers. If it discolors, it’s not possible to rehabilitate or refinish the material. Additionally, laminate’s soft composition means sharp objects can easily leave gouges, which are extremely difficult to repair. Although choosing a floor is a big decision, it doesn’t have to be stressful. You can always mix and match floorings to demarcate specific areas in your home. Focus on the function of each room and the image you are trying to create, and the possibilities will be endless.

- DeLeon Insight May 2016 15

Investing in a REIT By: Renn Isobe Real Estate Intern

n the early 2000s, many investors jumped onto the rollercoaster of excitement known as the stock market. However, once the stock market proved too volatile and inconsistent with forecasts, investors became less confident and looked elsewhere to invest their hardearned money. As our market evolves, millennials in particular grow more concerned about the future of their financial stability. Unfortunately, not everyone has the time or the millions of dollars it takes to operate a large corporation or commercial property. In today’s market, investors looking for stable growth and appreciation in value may want to consider a real estate investment trust (REIT). REITs can be broken down into two main categories—equity and mortgage—both of which can be traded on a national stock exchange. An equity REIT generates income via rent collection from tenants, appreciation of the property, and from the sale of a longterm owned property. On the other hand, a mortgage REIT derives income from the interest earned on a mortgage loan or mortgagebacked security of a commercial or residential property. REITs can be further classified based on their qualifications and requirements. An REIT allows a wide range of investors to take part in the ownership of a real estate venture with limited investment and without the hassle of operation or management. Instead, a real estate investment trust will manage the property for you. REIT companies carefully select the commercial properties to include in their portfolios to ensure they are welldiversified. Investing in an REIT not only alleviates the stress of managing income-producing property, but also provides many other financial benefits:

3) Equity REITs have little correlation to returns on the stock market over a long-term period. 4) The annual total return for an REIT proves more financially successful and stable over the long term. According to the National Association of REITs (NAREIT®), the yield on a 15-year investment for an REIT outperformed S&P 500 by 8.05 percent. With an 18-year trend cycle that is studied correctly, unforeseen, drastic changes are less likely to occur. 5) Tax treatment is simple. REITs do not pay taxes at the corporate level; however, these taxes are passed to the shareholders. As 90 percent of taxable income for the company must be distributed to shareholders as dividends, REIT companies are usually among the highest in terms of paid dividends. Homeowners in Silicon Valley have watched real estate prices skyrocket in the past few decades, but are unable to access this resource of wealth due to the illiquidity of their real property. Although some consider selling their property to be relieved of the hassle of ownership, they are more reluctant to take on the crippling capital gains tax that comes with it. Thus, investors have been exploring a special kind of REIT which ultimately satisfies this problem. With careful planning, the seller of highly appreciated investment property can exchange the investment property for operating partnership (OP) units in an umbrella partnership REIT (UPREIT) of equal value, resulting in the deferral of capital gains. This is accomplished by utilizing a 1031 exchange

1) REITs add diversity to your personal portfolio and tend to mitigate overall risk. 2) REITs are subject to the same operating rule as other public companies and must divulge the required financial reports by the SEC.

(see Michael Repka’s “Capital Gains and 1031 Exchanges” in this newsletter). Much like more conventional REITs, a UPREIT allows property owners to expand their interests from a single property to a diversified portfolio of carefully selected properties. This may be of particular benefit to sellers who do not want to actively manage a single investment property. With this type of transaction, there are two main risks. Upon completing this transaction, the UPREIT has control over the relinquished property and, if sold, may “trigger the recognition of the investor’s deferred capital gain and any depreciation recapture.” Oftentimes, UPREITs may agree to “not trigger any taxable gain for a specified number of years.” Also, once the investor sells the REIT shares back to the firm, the investor’s deferred capital gains taxes and depreciation recapture will be recognized.* Fortunately, shares in a UPREIT have its benefits around this in estate-planning. If OP units are held onto for life and have been included in a taxable estate, the heirs of the estate may sell the shares back to the firm for cash, without triggering the capital gains tax. The risks of investing in an REIT pales in comparison to the daily risk involved with investing in the stock market. REITs, with less volatility than the stock market, are growing in popularity for investors who are looking to diversify their portfolios, increase the liquidity of their assets, and receive steady dividends. To find out more about REITs, visit www.reit.com/ nareit. *“Investing in UPREITs as 1031 Exchange Replacement Property Solution.” Investing in UPREITs as 1031 Exchange Replacement Property Solution. Web. 12 Mar. 2016. <http://www.exeter1031.com/article_ upREIT_1031_721.aspx>.

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- DeLeon Insight May 2016 17

Negotiating Multiple Offers to Achieve the Highest Price By: Michael Repka, Esq. DeLeon CEO/Managing Broker

n Silicon Valley, multiple offers and aboveasking bids are common. In fact, it is not unusual for a home to receive 10 or more offers. Naturally, agents who are representing buyers like the opportunity to present their clients’ offers directly to the sellers so they can argue points beyond the price and terms of the offer. Like many very experienced buyer agents, Ken DeLeon can recount countless transactions in which he was able to get homes for his buyers for less than his clients were willing to pay and, occasionally, less than other offers, because he was able to present offers in person. This is great for buyers, but many sellers would prefer the highest possible price. Recently, I was having lunch with a Harvard Law School professor who teaches a great class in negotiation. He expressed surprise that listing agents would ever agree to a structure in which only one of the principals (the seller) was present. Nevertheless, many listing agents encourage their sellers to sit through all of the offer presentations, despite the fact that this approach can stack the deck against the sellers in the negotiation process. While some sellers may want to get to know the agent who is representing the buyers, it is important that the sellers consider the downsides to this approach before they blindly agree. The pros and cons of both approaches should be considered, and it should be up to the sellers to decide which method is right for them.

Live Offer Presentations In recent years, it has become common for listing agents to set a time for offers and to invite all interested agents to come and present their clients’ offers directly to the sellers (the buyers themselves rarely attend). Generally, listing agents sit in a conference room with their clients while each buyer agent spends about 20 minutes telling the sellers about their buyers and their offer. This gives the buyer agent an opportunity to ask questions of the sellers and vice versa. The first problem with this situation is that the real estate community is relatively small, so most successful agents know each other. When good agents present an offer, they love the opportunity to size up the competition. If other agents who are presenting offers have a reputation for sloppiness, inexperience, or— even worse—questionable ethics, then good agents will submit a lower offer knowing that the listing agent will prefer to work with them. If they don’t know who they are competing against, then their fear of losing the deal/ commission (and of their clients losing the house) will likely cause them to submit their clients’ highest offer. Additionally, there is always the fear that agents will compare notes about where their clients came in, which could hurt in the counteroffer process. Another problem arises due to the inequity of the structure. The buyer agent has the opportunity to “read” the reaction and ask questions of the sellers, yet the buyers are rarely in attendance, so the listing agent doesn’t get the same opportunity. Again, this can be a

tremendous help to the buyer agent, which usually means a corresponding detriment to the sellers. Furthermore, some buyer agents try to put additional pressure on the sellers through their comments or by making a response “due upon receipt.” Electronic Submission of Offers The alternative is to have all agents submit their offers electronically. In addition to removing the need for the sellers to sit in a conference room all afternoon, it also eliminates the inequities mentioned above. Once all of the offers are in, the sellers can review all of the details with their agent and ask any relevant questions. They also have the option of inviting the top offers into the office at that point if they so choose. Given that the DeLeon Team sells more Silicon Valley real estate than any other team in the nation, we have handled countless offers utilizing both the in-person and electronic submission approaches. Generally, we have found that the electronic approach results in the highest price for the sellers. However, we are happy to discuss the pros and cons of both approaches. We will employ whichever approach the sellers prefer, provided of course that the motivation for the in-person meeting is not related to a desire to discriminate based on a buyer’s race, age, gender, sexual preference, religion, or other inappropriate factors.

S e l l i n g y o u r h o m e? F i rs t, m e e t w i t h M i c h a e l R e p ka .

Meet with Michael today for tax and legal advice before listing your home. Unlike most real estate agents, Michael holds two law degrees and has years of experience as a real estate and tax attorney, giving his clients a unique advantage as most other brokerages do not provide an in-house attorney to help clients. In addition, the expertise and marketing available through the team at DeLeon Realty are the very best in the business. Meet with Michael to discuss any preliminary tax and legal questions about selling your home and let him tell you more about what makes DeLeon Realty’s innovative approach to real estate so successful. There is no cost or obligation for this consultation. However, Homeowners that have a current listing contract with another agent are excluded.

650. 488. 73 25

ww w.d el eon real ty.com

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27811 Saddle Court, Los Altos Hills

Hilltop Residence with Panoramic Views

Well-appointed indoor and outdoor spaces take full advantage of the astonishing vistas displayed throughout this 5 bedroom, 6.5 bathroom home of 6,598 sq. ft. (per county), which includes grounds of 1.94 acres (per county). The multi-level design is equipped for grand-scale entertaining and boasts five fireplaces, two kitchens, an indoor pool, and a garage that can hold five cars. Within moments of Highway 280, this captivating home balances privacy and natural beauty with prime convenience to urban amenities, including excellent Palo Alto schools (buyer to verify eligibility). For video tour & more photos, please visit:

www.27811Saddle.com Offered at $6,988,000

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12380 Gigli Court, Los Altos Hills

Luxurious Gated Oasis

Lush, tropical landscaping accents this spellbinding 5 bedroom, 4.5 bathroom home that offers gated grounds of 1.11 acres (per county). The alluring interior displays vaulted ceilings, luxurious updates, and gorgeous spaces that include a gourmet kitchen, a regal master suite, and an office. Boasting peace and privacy, the residence also provides five fireplaces, a three-car garage, and a versatile poolhouse. You will have prime access to Highway 280, Fremont Hills Country Club, and terrific PAUSD schools.

For video tour & more photos, please visit:

www.12380Gigli.com Offered at $5,988,000

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- DeLeon Insight May 2016 21

202 Camino Al Lago, Atherton Showstopper Estate in Prime Atherton Located in the prized Circus Club area, this state-of-the-art gated estate holds a main home with 5 bedrooms, 5 full and 2 half baths, and a 1 bedroom, 2 bathroom guesthouse, boasting a collective living area of 10,973 sq. ft. (per plans). Rebuilt in 2013, the home is bursting with high-tech amenities and offers stately yet inviting entertaining spaces. Imported fixtures enhance the luxurious ambience, while the private grounds of 1.24 acres (per county) showcase exciting outdoor living areas. Prestigious schools are within strolling distance. For video tour & more photos, please visit:

www.202CaminoAlLago.com Offered at $16,850,000

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22â&#x20AC;&#x201A; DeLeon Insight May 2016 - ÂŠ 2016 DeLeon Realty

66 Yale Road, Menlo Park

Contemporary Villa in Allied Arts

This luxurious 4 bedroom, 4 bathroom villa of 3,180 sq. ft. (per county) stands on a property of 9,750 sq. ft. (per county) and blends European charm with contemporary aesthetics. Elegant yet low-maintenance, this updated residence oﬀers three ﬁreplaces, a twocar garage, and a heated lap pool, while a gated entry courtyard links to the private rear haven, perfect for outdoor entertaining. Stroll to Stanford Shopping Center, and live within mere moments of Stanford University, Caltrain, downtown Palo Alto, and incredible MPCSD schools. For video tour & more photos, please visit:

www.66Yale.com Offered at $4,298,000

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- DeLeon Insight May 2016 23

DeLeon Market Conditions Atherton Snapshot Atherton Median Sales Price & Price/Sq. Ft. Ratio

Atherton Inventory # of New Listings

Cupertino Snapshot Cupertino Median Sales Price & Price/Sq. Ft. Ratio

Cupertino Inventory # of New Listings

Hillsborough Snapshot Hillsborough Median Sales Price & Price/Sq. Ft. Ratio

Hillsborough Inventory # of New Listings

DeLeon Market Conditions Los Altos Snapshot Los Altos Median Sales Price & Price/Sq. Ft. Ratio

Los Altos Inventory # of New Listings

Los Altos Hills Snapshot Los Altos Hills Median Sales Price & Price/Sq. Ft. Ratio

Los Altos Hills Inventory # of New Listings

Menlo Park Snapshot Menlo Park Median Sales Price & Price/Sq. Ft. Ratio

Menlo Park Inventory # of New Listings

- DeLeon Insight May 2016 25

DeLeon Market Conditions Mountain View Snapshot Mountain View Median Sales Price & Price/Sq. Ft. Ratio

Mountain View Inventory # of New Listings

Palo Alto Snapshot Palo Alto Median Sales Price & Price/Sq. Ft. Ratio

Palo Alto Inventory # of New Listings

Portola Valley Snapshot Portola Valley Median Sales Price & Price/Sq. Ft. Ratio

Portola Valley Inventory # of New Listings

DeLeon Market Conditions Sunnyvale Snapshot Sunnyvale Median Sales Price & Price/Sq. Ft. Ratio

Sunnyvale Inventory # of New Listings

Redwood City Snapshot Redwood City Median Sales Price & Price/Sq. Ft. Ratio

Redwood City Inventory # of New Listings

Woodside Snapshot Woodside Median Sales Price & Price/Sq. Ft. Ratio

Woodside Inventory # of New Listings

- DeLeon Insight May 2016 27

PRSRT STD ECRWSS U. S. Postage Paid Palo Alto, CA Permit No. 1

DeLeon Realty 2600 El Camino Real, Suite 110 Palo Alto, CA 94306

LOCAL POSTAL CUSTOMER

Tax Issues Relating to Real Property Thursday, June 23rd, 2016 6:00 - 8:00 p.m.

Please join DeLeon Realty at our June Seminar. Gain insight into tax issues relating to real estate from Michael Repka, the managing broker and general counsel of DeLeon Realty. Also, hear the latest market updates from Ken DeLeon, the most successful real estate broker in Silicon Valley, along with his team of talented area specialists, who focus on specific neighborhoods throughout the area. Venue: Palo Alto Hills Golf & Country Club, Grand Ballroom 3000 Alexis Drive, Palo Alto

To RSVP, please contact Kimberly Vigil at 650.543.8500 or by email: RSVP@deleonrealty.com ®

650.488.7325 | www.deleonrealty.com | CalBRE #01903224