The DeLeon Insight Silicon Valley Real Estate January 2015
REAL ESTATE
GAME PLAN • Strategies for maximizing your real estate investments • When to buy or sell • Get your home ready for the winter
www.deleonrealty.com
The DeLeon Update: Market Trends
Average Sales Price 2013 & 2014
$6,000,000 $5,000,000
Atherton
Los Altos
Los Altos Hills Menlo Park Mountain View Palo Alto 1/2013-12/2013 1/2014-12/15/2014
Woodside
Average sales price for single family residential homes from 1/2014 to 12/2014 increased when compared to the average sales price during the same period in 2013, except Portola Valley.*
Average Price/Square Foot 2013 & 2014 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Atherton
Cupertino
Los Altos
Los Altos Hills 1/2013-12/2013
Menlo Park
Mountain View Palo Alto
Portola Valley Woodside
1/2014-12/15/2014
Average price per square foot for single family residential homes along the Peninsula increased from 1/2014 to 12/2014 compared to the same period in 2013.* *Data gathered from the Multiple Listing Service on 12/15/2014.
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Atherton 2014: The Evolving Expectation of Privacy KEN DELEON, FOUNDER & ROB PARISH, ESQ., DELEON ATHERTON BUYER SPECIALIST
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n October 2014, Forbes named Atherton, California (94027), the most expensive zip code in the country for the second year in a row. The local market has been experiencing incredible appreciation, which is directly attributable to both the vibrant local economy and the continuing investment of international buyers seeking premium tangible assets. Taken as a whole, home values in Atherton increased 34 percent over the past two years. However, as the attached table demonstrates, the main catalyst for this growth has been the appreciation of trophy estates on parcels of 30,000 square feet or more. As of November 16, 2014, 95 transactions have closed this year in Atherton. The most expensive transaction reported to the Multiple Listing Service (MLS) was the $18,900,000 sale of 244 Polhemus Avenue. However, that sale was not the most expensive in town this year. The MLS also reports the sale on February 21, 2014 of Bella Sera, a 2.5 acre estate on Atherton Avenue. While the property
had been listed at $27,400,000, the selling price was not disclosed. The listing agent had paid a small fee to the MLS in order to withhold the selling price. Nevertheless, a simple search of the home address on the internet reveals that the selling price was $25,000,000. While ultimately unsuccessful at hiding the price, this technique is indicative of a growing trend in Atherton: the desire for anonymity. As personal information becomes more and more accessible through publicly available title records, securities filings, and the media, many buyers of expensive properties seek to withdraw from public scrutiny to the maximum extent possible. Two strategies are actively being employed to stem the flow of information.1 A. THE USE OF LLCS Limited Liability Companies (LLCs) are becoming the vehicle of choice to allow owners of real property to hide their identity. In 2014, more than fifty percent of Atherton real estate transactions involving
properties valued at more than $5,000,000 were made by legal entities designed to shield the owners (16 LLCs, two limited companies, and one corporation). This number is higher than the national average. In 2012, the Wall Street Journal reported that 27percent of all purchases in this price range were by LLCs or trusts. (Alyssa Abkowitz, “Psst. Wanna Buy A House?,” Wall Street Journal, October 25, 2012). As the article noted, these legal entities are virtually untraceable when properly set up. In California, the process for setting up an LLC is routine, but requires an agent for service of process and minimum filing fees of $800 per year. Frequently, the LLC is named for the property’s mailing address to simplify the tracking of correspondence. Indeed, such logic is consistent with the desire to keep personal connections to a minimum. The most unusual name for an LLC making an Atherton purchase last year was the $9,675,000 purchase of 73 Amador Avenue by the Tacotacotaco LLC. A recent change in California law which eliminates a loophole many relied on to keep the amount of documentary transfer tax due (based on the sales price) out of the public eye will make the use of an LLC even more attractive to those who desire confidentiality. The Documentary Transfer Tax Act allows counties and cities to impose a tax on each deed, instrument, or writing by which any real estate is sold within the jurisdiction at the time the document is recorded. While the Act required that the amount of tax be displayed on the face of a document, savvy agents and their clients regularly bypassed that requirement by requesting that the amount of tax be shown instead on a separate piece of paper to be attached to the document after recording and before the original was returned to the parties. If the amount of tax due was listed on a separate page that was not part of the public record, then the public could not glean the amount of tax imposed on the transaction or derive the property value
A third option to protecting a client’s privacy involves the use of Nondisclosure Agreements (NDAs). For a brief overview of these documents and their use, please check out the full version of this article on the DeLeon Realty website (http://www.deleonrealty.com/whydeleon/articles). 1
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from the recorded instrument. Assembly Bill No. 1888, effective January 1, 2015, prohibits county recorders from recording any deed, instrument, or writing subject to the documentary transfer tax unless a signed declaration of the amount of tax due appears on the face of the document for all to see. Another major advantage of using an LLC is that routine expenses associated with operating a property may be treated as business expenses, including maintenance, homeowner-association fees, taxes and utilities. These should be paid from the LLC’s account. However, the responsible person for all such accounts should remain the LLC’s publicly disclosed agent. The inadvertent inclusion of an owner’s contact information on a utility bill or voter registration form may lead to an unintended loss of privacy. The concept of an LLC is elegant in its simplicity and has been widely adopted. However, LLCs must be established and operated according to specific principles to be legally recognized. Real estate agents, attorneys, and tax accountants should all be consulted for the purchase and sale of California property through an LLC. 2 B. POCKET LISTINGS Another possible option for sellers wanting to maintain their privacy is to market their property as a pocket listing, which is when a seller elects to engage a listing agent to market their home without putting it on the MLS. The reasons can be as varied as divorce, financial crisis, seasonal timing, or simple discretion. When a listing agent takes a pocket listing, they will contact top-producing agents in the area about the home’s availability. If one of these well-connected agents has a suitable client, the home may sell off market. Private marketing efforts are usually successful, if at all, in the first 60 days of a campaign. However, there are real economic risks with this approach, and sellers need to be fully advised before proceeding. First, limited exposure means there is less likelihood of multiple offers. In 2014, direct
ATHERTON SALES OF 30,000+ SQ. FT. PROPERTIES Change in Average
2013 Average/ 2014 Average/ 2014 Average/ 2012 Average 2013 Average 2012 Average Town of Atherton Up 15.3% Up 16.9% Up 54.1% West of the Alameda Up 44.7% Up 46.0% Up 111.4% West Atherton Down 0.1% Up 15.7% Up 15.7% Atherton Oaks (Middlefield-ECR) Up 15.2% Up 37.8% Up 58.8% Lindenwood Up 30.4% Up 9.7% Up 44.5%
* Each year some sellers elect not to report their selling prices on the MLS (2012 – 6 sales; 2013 – 8 sales; 2014 YTD – 3 sales). competition led to many of the spectacular results that were achieved. Earlier this year, DeLeon Realty had a listing in Atherton that received ten offers and sold for 38 percent more than the list price after nine days on the market. Such opportunities are eliminated by use of the pocket listing. Second, agents may be tempted to not broadcast their client’s home to other agents in an effort to earn commissions from representing both the seller and their own buyers. This practice is permitted under state regulations and most brokerages’ policies. However, the risks are significant enough that the California Association of Realtors created a form to be used in such circumstances: “Disclosure and Consent for Representation of More Than One Buyer or Seller” (C.A.R. Form DA, 11/06). One simple example of this second problem is the situation when an agent signs a listing agreement that includes listing the property on the MLS, but holds preliminary open houses while preparing a home for market. The practice is common and the economic cost to the sellers may be profound. Quantifying the economic costs associated with such arrangements is difficult. However, DeLeon Realty advises sellers as follows:
The reason for the sliding scale is the sophistication of the market place. There is a direct correlation between the price of the property and the likelihood that potential buyers will be represented by a leading area agent. Thus, higher-end homes lose less by being off the MLS. Since the buyer of an ultra-high-end property probably desires the same level of privacy as the seller, everybody is well represented and prepared to undertake reasonable and reciprocal precautions. CONCLUSION In the new millennium, the unprecedented access to information has transformed our society. Instead of becoming obsolete, real estate agents learned to act as concierges, filtering the deluge of available information and gleaning only what is meaningful. The next step in that evolution is helping clients lessen their digital footprint to the greatest extent possible.
List Price Seller’s Cost Due to Being Off MLS Below $5M 3-4% $5M-$10M 1-2% Above $10M 0.5%
For a concise introduction regarding the use of LLCs in California real estate, see Ken DeLeon and Michael Repka, “Owning Real Estate Through an LLC,” Palo Alto Daily Post, November 15, 2013. 2
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Rebates and Freebies for Your Water Conservation Efforts CURT SRAMEK, DELEON CONSTRUCTION CONSULTANT
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n the preparation and maintenance of your home for the coming year, you may want to consider taking some water conservation steps such as retrofitting your sprinkler system with high-efficiency nozzles, hooking up your clothes washer to a graywater system, replacing your washer or toilet with a high efficiency model, installing a rain barrel, or putting in a faucet aerator. The good news is that your local water agency may offer an applicable rebate and/ or free water-saving devices. For example, residents of Santa Clara County can get up to $2 per square foot for the conversion of turf to water-efficient landscaping, residents of San Mateo County can get $100 for each qualifying rain barrel purchased and installed, and Palo Alto residents can request free low-flow showerheads, faucet aerators, and other water saving devices. The Santa Clara Valley Water District offers the following four (4) rebates to residents: Graywater to Landscape, Highefficiency Clothes Washer, High-Efficiency Toilet, and Landscape. Under the Graywater to Landscape program, a resident can receive $200 for connecting a washer to a graywater irrigation system that meets the program’s requirements. More commonly, residents can purchase and install a high efficiency clothes washer and/or a highefficiency toilet, and receive up to $200 for
the former and up to $125 for the latter. For conversions of a swimming pool or irrigated turf to water efficient landscaping, participants can receive up to $2 per square foot under the Landscape Rebate program. The programs have specific limitations and guidelines, and only certain zip codes are included, so please contact your local water agency for more information. For San Mateo residents, the Bay Area Water Supply and Conservation Agency offers four (4) similar programs. Its Rain Barrel Rebate provides up to $100 for qualifying rain barrels. Receive up to $100 For certain high-efficiency toilets and clothes washers, residents can receive up to $100 for the former and up to $200 for the latter. For conversions of high-consuming,
water-fed landscapes to water-conscious landscapes, the Lawn Be Gone! Rebate offers participants $1 per square foot. In addition to rebates and free devices, there may be free local workshops on water efficiency measures and strategies. Please contact your local city or water agency for more information.
CITY INFORMATION Santa Clara Valley Water District Water Conservation Rebates http://www.valleywater.org/ programs/rebates.aspx Water Conservation Hotline at (408) 630-2554. San Mateo County Bay Area Water Supply and Conservation Agency http://bawsca.org/conservation/ Phone: 650-349-3000 City of Palo Alto Residential Water Conservation Programs http://www.cityofpaloalto. org/gov/depts/utl/residents/ resrebate/resiwater Phone: (650) 329-2241
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Game Plan to Optimize Cyclical Market Conditions ALEXANDER WANG, DELEON PALO ALTO SPECIALIST
T
he seasonal sway of the Palo Alto real estate market is common knowledge to most local agents and individuals looking to sell or buy a home. The ebbs and flows of the market are best illustrated by looking at the number of days a home is on the market and the number of new listings that come on the market to help sellers and buyers make strategic timing decisions.The number of days a home is on the market is an important factor to consider when selling or buying a home. This number means different things to sellers and buyers. A seller should avoid listing their home in January, August, November, and December. During these months, homes tend to sit on the market significantly longer than during other months of the year. The average days a home is on the market for this time frame are 29 days in 2012, 27 days in 2013, and 28 days year-to-date in 2014. Compare this to the days a home is on the market for the rest of the year: the average in 2012 was 22 days, 14 days in 2013, and 14 days in 2014 year-to-date. During the slow season, homes sat on the market for over a week longer in 2012, about two weeks
longer in 2013, and about two weeks longer year-to-date in 2014. As homes remain on the market, they become stale and increasingly difficult to sell. Conversely, this is a great time to buy, as sellers become anxious when their home does not sell in a timely manner and are more likely to negotiate terms and accept a lower sale price. Another good metric to consider when selling or buying a home is the number of new listings each month. Like the number of days on the market, the same data points have a different impact on sellers and buyers. The data again shows that, in January, August, November, and December, sellers should avoid listing their home. The holiday months and mid-summer doldrums result in fewer homes coming on the market. The average number of new listings during these months was 27 in 2012, 20 in 2013, and 23 year-to-date in 2014. Compare these results to the averages for the remainder of the year: 55 in 2012, 45 in
Number of New Listings 60.00
55.25 45.75
NEW LISTINGS
50.00
43.38
40.00 30.00
27.00
23.50
20.50
20.00 10.00 0.00
2012 1
2013 2
Jan, Aug, Nov, Dec AVG:
Feb-Jul, Sep-Oct AVG:
*Data from MLS 1/2012 - 12/2014
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2014 3
2013, and 43 year-to-date in 2014. There are about half as many new listings during the slower months than during the busy time of the year. Sellers are tempted to take this single metric and conclude that less competition is better, but once the days on the market are taken into account, it becomes apparent that these are the months when homes sit on the market the longest. In addition, when there are fewer homes on the market, buyers tend to lose focus and make fewer offers. This means a home receives less overall attention and fewer visitors, which translates into a lower probability of a multiple-offer situation. Yet from a buyer’s perspective, it is again a good time to make a move since the market is slower, there is less competition, and sellers have fewer offers to choose from. Both the days on the market and the number of new Listings, when taken together and examined in monthly increments, demonstrate that sellers may want to consider listing their home between the spring and early summer months or during the smaller Septemberto-October window, while avoiding the beginning and end of a year, as well as midsummer. For buyers, the months that are worst for a seller become the best time to purchase. The obvious downside is that it is more difficult to find a suitable home.
Interior Design
GamePlanForHomeRenovations R E N ATA C OS TA, JR. DE SI GN COORD I N AT OR
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reating a water-tight game plan is crucial when working on home improvements or renovations. Four fundamental steps should typically be followed in order to build a successful renovation plan. First, gather ideas and concepts for your home. Next, calculate your budget. Third, recruit your renovation team and, finally, establish a realistic timeline. Following these steps will create a strong foundation for your project, helping eliminate potential issues for first-time renovators. Before any home renovation, start building your own personal catalogue of concepts and ideas. A couple of great tools to aid you in sifting through home design ideas are websites such as Pinterest and Houzz. Other avenues include home improvement magazines, showrooms, and local open houses. When visiting a showroom or store, look through samples. Don’t be afraid to bring them home, as color matching and lighting will sometimes be different. Some important questions to ask yourself are: Who will be using the space the most? How will it be used? What is the overall feel I want to accomplish? When answering these questions, be realistic and honest with yourself. Doing this will help you create a great space that truly fits you
and/or your family’s needs. After you have determined a concept, focus your attention on creating a budget. This is an incredibly important parameter to establish as it dictates the financial limits of your project. We recommend obtaining estimates from at least three contractors, not only for price comparison but also to become familiar with material and labor costs. Once you have received these estimates, prioritize and trim your to-do list. Often, the price tag of the homeowners’ wants exceeds their budget. As a rule of thumb, add an additional 1520% to your budget. This will give you a safety net for unexpected costs that often surface during construction. In your pursuit to find contractors, utilize the internet, friends and family. A great online source is Angie’s List, where you can find licensed contractors and also check their references and testimonials. Knowing someone who has already established a relationship with a contractor can be extremely helpful, so ask any family or friends who have had renovations as to whom they would recommend. After you have found a potential contractor, check out their current projects to become better acquainted with their quality of work. Once your contractors have been
selected, prepare a schedule with them. Work with them to create a realistic timeline and establish an expected completion date that is understood by all parties. By doing this you will better familiarize yourself with the process. Make sure to keep records of all estimates, permits, and contracts, and only allow work to start once you have documentation of your approval. If in any case you must request a modification to the scope of work, also known as a change order, document these revisions as well. Lastly, confirm that all touch-ups or fixes are complete before submitting your final payment. It is completely normal to feel overwhelmed by all of the moving pieces involved in a home renovation. However, don’t fret! If you properly use the resources around you, the tasks will be less daunting. Before and throughout the renovation process, continuously educate yourself by looking up do-it-yourself instructional videos and articles. By following these guidelines, you will feel less overwhelmed and have a better vantage point to spot any potential issues. Always remember to be flexible and listen to your contractors. Most importantly, don’t lose sight of the end goal and what you are setting out to accomplish!
JANUARY 2015 DeLeon Insight 6
CONSTRUCTION ZONE Preparing Your Home for the Winter Months CAMERON PERRY, FIELD COORDINATOR
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he winter months can present the greatest challenges to your home. With foresight and diligence, you can have a delightful and warm winter in your home if you follow these strategic tips. HEATING AND COOLING Inspect your furnace or heat pump to make sure it is clean, in good repair, and is running efficiently. Inspection should include checking for carbon-monoxide leakage. With forced-air heating, check exhaust vents and air-shutter openings for dirt and dust. Clean lint and dirt from the blower blades, motor, burner (if you have a gas heater) and vacuum air passages. Check fan belts and replace if necessary. To prevent airborne dirt from circulating throughout your home, wash out your reusable filter or replace it if it’s disposable. ROOFS AND GUTTERS You should also take steps to prepare for rain by fixing fascia boards and repairing any damaged gutters and downspouts. Adding extensions to downspouts so water runs three to four feet away from the foundation is also important. Cleaning gutters and downspouts is critical; clogged gutters do not allow water to properly drain away from your home, which can cause seepage in your ceiling and walls. You may want to consider investing in gutter guards, which are screens that prevent debris from entering the gutter and direct the flow of water away. Other recommended tasks include replacing loose or missing shingles on the roof, repairing breaks in the roof flashing, sealing around vent stacks and chimneys, and, if you have a flat roof surfaced with asphalt and pebbles (like that of a traditional Eichler-designed house), raking or blowing off fall leaves or pine needles which hold damaging moisture.
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FIREPLACE It is advisable to clean your chimney flue and check the seal, which is designed to keep out drafts of cold air. Make sure your chimney and vents are clean and in good repair. WATER HEATER Have you had your water heater checked before? If not, now is the time to have your tank’s pressure relief valve checked, as well as remove sediment from the bottom of the tank by draining two gallons of water to improve heat transfer and efficiency of your heater. Be sure to check the strapping of your water heater to ensure it is secure. WATER PIPES Wrapping pipes with blanket insulation and duct tape or encasing the pipes with pre-formed plastic foam will protect them from frost and freezing temperatures. Foam wrapping reduces the amount of heat lost by insulating the pipework. It is advisable to examine your pipes for cracks and leaks. SUMP PUMP Those of you who have sump pumps should pour several gallons of water into the sump pump to see if it automatically turns on. This is especially timely if your sump pumps are about ten to fifteen years old, which is when they are more likely to fail. DOORS, WINDOWS, AND ATTIC Minimize heat loss by making sure doors and windows are properly sealed and repairing or replacing weather-stripping around door bottoms, jambs, and window frames. Check for loose or missing glazing putty and caulking for deterioration. Since a quarter of the heat in your house is lost through the roof, you should also look for
air leaks and inadequate insulation in your attic. Look for any gaps in your siding where cold air and moisture could penetrate. Performing these common maintenance procedures can help protect the value of your home and prevent the need for major repairs during winter.
MEI LIANG, DELEON CONDO SPECIALIST
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any first-time homebuyers often debate whether they should buy a condo or townhome now, or wait a few years so that they can buy their ideal home in their preferred location. Others contemplate the options of buying a condo or townhouse in their desired location versus buying a single-family home in a less desirable location. The properly considered decision is the result of a strategic game plan to capitalize on the rising market, and often this plan should be to buy a condo now in the city with the highest projected appreciation. While most first-time homebuyers are more conservative with their purchases, they should be thinking about the end game five to seven years down the road. Keep in mind that as rent increases, ownership is a much better alternative to paying rent because you can build up equity and get tax benefits. Low mortgage interest rates also incentivize buyers to get into the market now. The real estate market has many driving trends that tend to follow a seasonal cycle that buyers should factor into their game plan. This can be seen throughout the slow winter season, which leads to a great opportunity for buyers, and the busy spring season, which is a perfect time for sellers to list their homes. An additional benefit to homeowners that may be unknown to many first-time homebuyers is that, if they go to sell and they have lived in their home for a minimum of two years out of the past five,
they will get a capital gains exemption upon the sale of their home. The exemption is up to $250,000 in profit if one is single, and up to $500,000 if one is married. It is important to note that the property must be a seller’s primary residence. This tax break does not apply to a house or any other property that is held solely for investment purposes. When homeowners decide to sell after a few years, they can use that extra savings to invest into their actual dream house. Even if a buyer today decides not to sell their condo later, they can keep it as an investment property, as they also make great rentals with very low maintenance. Then, when they decide to sell their investment condo sometime down the road, they can utilize a 1031 exchange to defer capital gain taxes. If one compares the appreciation of a condo in Palo Alto over the last three years to that of a single-family home in Santa Clara with similar values, the Palo Alto condo still has an overall higher average appreciation. A Palo Alto condo or townhouse appreciated on average about 17 percent over the past three years as compared to a Sunnyvale single-family home which appreciated on average about 15 percent over the same amount of time, and this is on top of the intangible benefits of ownership, like security and the pride of homeownership. A second comparison between a condo in Mountain View to a
90 80 70
Percentage
Buying A Condo Now
single-family home in Santa Clara yields very similar results. Over the past three years, a condo in Mountain View had an average of about 17 percent appreciation and a single-family home in Santa Clara had an average appreciation of about 14 percent. Certainly not all single-family homes will necessarily have more appreciation when compared to a condo or townhouse, but these statistics prove an observable trend. Ultimately, it comes down to the city and the location of the home being the biggest driving factors. Both Palo Alto and Mountain View condo locations offer better schools, more new construction and development, proximity transportation, and high walkability to shops and restaurants. A similarly valued single-family home in either Sunnyvale or Santa Clara may not offer the same convenience, benefits, or appreciation. Whether you are looking to buy your very first home or to downsize, make sure that you have a well thought-out game plan ready so that you can work with a local, knowledgeable agent to help execute your plan.
60 50 40 30 20 10 0 2012
2013
2014 YTD
SC Average Appreciation % MV Average Appreciation % SV Average Appreciation % PA Average Appreciation % *Data from MLS 1/1/2012 - 12/1/2014
  JANUARY 2015 DeLeon Insight 8 
Real Estate Game Plan MICHAEL REPKA, DELEON MANAGING BROKER
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eal estate has traditionally been one of the best ways to build true wealth. The combination of security, leverage, and tax advantages are virtually unmatched in the investment world, yet people devote far more time and energy to developing a long-term strategy for managing their stock portfolio than they do in developing a long-term real estate game plan. This is true even though most people have more money invested in real estate than in any other asset class. Without question, a lot of people do make money in real estate, especially in Silicon Valley, but this is often despite their lack of planning. As is true with any investment plan, the highest level of success in real estate begins with a sound strategy that is proactively developed rather than just stumbled into. Having this sound strategy can lead to substantial rewards. DETERMINE A GOAL Generally, people buy real estate with one of three objectives in mind: (1) to have a home in which to live, (2) to build net worth, or (3) to create a safe income stream that will likely grow over time.
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Unfortunately, many people utilize the wrong type of real estate given their specific objective. This is most often a result of retaining a particular piece of real estate even though the desired objective has changed, such as when owners keep their old home as a rental property after they move up to a larger home. When the goal is to have a home in which to live, then the buyers should give careful consideration to what their needs will be over the next ten years. If their family or space needs are likely to grow, then they should buy a home that can accommodate such growth or remain particularly cognizant of potential resale value so they can trade-up. Thus, a home that can be expanded in a cost-effective way might be a great choice. On the other hand, buyers who anticipate a growing income may find it more cost-effective to stretch to buy a larger home rather than endure the cost and inconvenience of an additional move. Real estate investors looking to build net worth, on the other hand, should target homes that are either poorly prepped and/
or marketed, listed during the slow times of the year, such as the winter or midsummer months, or located in an area with a lot of new construction, which tends to bode well for appreciation. These homes can often be resold a few years later at a significant profit. A well-advised investor may want to find a home that needs cosmetic improvements to enhance the value, make the improvements, rent it out for a year or two, and then sell it at a profit. Practical considerations, such as a usable floor plan, should carry more weight than subjective elements, such as the style of the home. Buyers looking for cash flow may want to consider multi-family or commercial properties over single-family homes. Rather than holding a former personal residence as a rental property indefinitely, consideration should be given to selling that property and buying something that provides better cash flow. If properly structured, the deferral rules under Section 1031 of the Internal Revenue Code provide for a deferral of capital gains on the sale of the original property.
TAX-EFFICIENT PLANNING Clearly, there are tax advantages to buying and holding real estate. First, the gain on the investment is not taxed until the property is sold. Second, thanks to Prop 13 and the historical rate of real estate appreciation in California, long-term holders of real estate generally pay less property tax. As a result, many people resist liquidating investment
real estate. However, these same people run the risk of missing out on one of the most generous tax advantages in the Internal Revenue Code which, namely, is the complete exemption—not mere deferral— from tax up to the first $500,000 of capital gains on a couple’s primary residence. Combining strategies can prove particularly valuable. For example, a couple who expects to start a family in a few years may be open to upgrading every few years. Thus, they may want to buy a home in need of improvement so that they can experience above-average appreciation after they cure the superficial flaws. Over the course of the next three or four years, they can make the improvements necessary to boost the home’s value. Provided they are married and filing a joint return, they should be able to sell the property and exclude up to $500,000 in gain, which becomes available as an additional down payment for the next home. Thus, this couple is able to build a substantial net worth, tax-free, while also enjoying a great home that can
FEATURED LISTING
2275 AMHERST STREET, PALO ALTO LISTED FOR $3,988,000 THE CROWN JEWEL OF COLLEGE TERRACE • • •
• • • • •
North Palo Alto estate set on a nearly 20,000 square foot lot Over 3,100 square feet of living space plus a finished attic of approximately 1,000 square feet Recently remodeled chef ’s kitchen boasts a Wolf range, Sub-Zero refrigerator, quartz countertops, custom cabinetry, and crown molding 7 bedrooms, 3.5 baths Historic home Separate one-bedroom apartment on lower level Spacious driveway and three-car garage Escondido Elementary, Jordan Middle, and Palo Alto High (buyer to verify enrollment)
www.2275AmherstStreet.com
accommodate their growing family. Like any investment, long-term success in real estate starts with knowing your goals, having long-term objectives, and understanding the tax benefits. A good real estate agent should help you develop an approach that works for your long-term investment strategy, not their short-term commission income. Make sure you discuss all of your future plans rather than just your current needs.
Obama’s New Visa Law Opens the American Door to Chinese Buyers KIM HENG, DELEON DIRECTOR OF CHINESE OPERATIONS
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arlier this month, President Obama announced a new plan to further open the American door to the Chinese and predicted that this new visa agreement could inject billions of dollars into the U.S. economy. “Under the current arrangement, visas between our two countries last for only one year. Under the new arrangement, student and exchange visas will be extended to five years; business and tourist visas will be extended to ten years,” said President Obama at the Asia-Pacific Economic Cooperation summit in Beijing. Prior to this agreement, Chinese citizens had to renew their American business, tourist, and student visas annually. This visa regulation for travel from China to the U.S. was “one of the biggest stumbling blocks” for Chinese buyers of U.S. real estate, said Simon Henry, co-chief executive of www. juwai.com, China’s largest international real estate website. According to the White House, 1.8 million Chinese tourists visited the U.S. in 2013, generating $21.1 billion to the U.S. economy, and with this new visa law, up to 7.3 million Chinese visitors are projected to visit America in 2021, contributing roughly $85 billion per year to the U.S. economy, predicts U.S. Secretary of Commerce Penny Pritzker. As an organization that makes frequent
11 DeLeon Insight JANUARY 2015
trips to Asia, DeLeon Realty understands the convenience of a multi-year, multipleentry visa. In fact, as I sit here writing this article, we are awaiting Michael Repka’s third visa for his fourth trip to Asia in the past two years. But what impact will this new visa law have on the real estate market here in Silicon Valley? We predict the local real estate market will receive a further boost as a result of the new U.S./China visa agreement. The new business and tourist visas will encourage more Chinese to travel to the U.S. and stay for longer periods of time. Likewise, with the extension of student visas, more Chinese parents will consider sending their children to U.S. schools. For these Chinese, having a permanent place to live while working or studying will be important. For years, many affluent Chinese looked to U.S. real estate due to its stability and diversification. The new visa agreement will encourage those on the fence to consider taking the plunge and investing in U.S. properties. Not only will it be easier for them to come to the U.S., but it will also be easier for their friends and family to make frequent visits. Given our thriving local economy, appreciating real estate market, excellent schools, and great weather,
Silicon Valley properties will be serious considerations for these folks. Moreover, Silicon Valley properties are considered reasonable compared to those in Shanghai or Beijing. “International buyers…are often surprised at how reasonable our prices appear,” says Ken DeLeon, founder of DeLeon Realty. While the new visa agreement will likely contribute greater investment into the U.S. market, China’s strict currency regulations remain in effect, and we have seen enhanced enforcement by the Chinese central government over the past six months. These regulations prevent large amounts of currency from moving out of China. For example, Chinese nationals are allowed to transfer the equivalent of U.S. $50,000 per year into a foreign bank account. Given the hot, all-cash, non-contingent real estate market in Silicon Valley, buyers from China looking to purchase properties in this area should plan ahead and care should be given to ensure compliance with all U.S. and foreign laws. Additionally, these buyers should be prepared to provide proof to sellers that the funds are available. Along the same vein, sellers and agents should request for proof of funds with the offer letter to ensure that the buyers have the ability to close on time. Furthermore, when verifying funds, listing agents must understand the significant differences between the rules that apply to mainland China and to Hong Kong, which is classified separately as a special administrative region. In conclusion, we are optimistic that the new U.S./China visa agreement will have a positive impact on the housing market in Silicon Valley in the coming years. References: 1. Kenneth Rapoza, “Obama’s New Visa Law Seen Helping Chinese Buy U.S. Real Estate,” www.forbes.com, November 14, 2014. 2. E. Scott Reckard, Andrew Khouri, Hugo Martin, “New Visa Rules Expected To Boost U.S.-China Tourism, Investment,” www.latimes. com, November 13, 2014. 3. Ken DeLeon, “Worldwide Real Estate Impact On Silicon Valley,” DeLeon Insight, September 2014.
Trading Up in Portola Valley KRISTEN WATSON, DELEON PORTOLA VALLEY SPECIALIST
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or young families who want to raise their children in tranquil Portola Valley, one of the best ways to enter that market is by purchasing a home in the nearby, unincorporated Ladera neighborhood. It is minutes from Interstate 280 and Stanford University, and walking distance from Portola Valley’s shopping center, the Ladera Country Shopper. In addition to its close proximity to urban areas of Silicon Valley, Ladera is also served by the Las Lomitas School District with its excellent schools and consistently high test scores. To top it off, Ladera is reasonably affordable compared to other neighborhoods in Portola Valley, such as Central Portola Valley and Portola Valley Ranch. Ladera home prices have been steadily increasing in the last five years, from the average sales price in 2010 of approximately $1.637 million to the average sales price in 2014, year to date, of approximately $2.072 million. The most substantial jump in appreciation has occurred this past year, up 16 percent. With prices in Menlo Park and Palo Alto going through the roof, DeLeon Realty believes appreciation will continue to rise in Ladera as tech employees look to surrounding cities for alternative locations for their future homes. After purchasing a home in Ladera, there are many ways owners can take steps to
increase the value of their home and take full advantage of potential appreciation in order to eventually trade up and buy a home in the affluent Central Portola Valley neighborhood. For instance, cost-efficient improvements can dramatically increase the value of the home. Such improvements include installing or refinishing hardwood floors, adding a fresh coat of paint to the interior of the home, and remodeling the kitchen and bathrooms. Money spent strategically on a home can bring a return of up to three times the amount spent in an appreciating market. In addition, there are a few strategies that can be used for financing the purchase of a new home when trading up. The most commonly used method is obtaining a home equity line of credit to use as a down payment. For a more expedient option, some banks will also allow buyers to obtain a bridge loan. Central Portola Valley, with its privacy, spectacular views, and large lot sizes, has not yet had a major wave of appreciation in the last few years. However, with the explosive appreciation in neighboring cities such as Palo Alto, Menlo Park, and Los Altos, as well as in Ladera this past year (whose appreciation is projected to continue), Central Portola Valley is the next place wealthy tech executives will look for
purchasing their new homes. Attractive to many buyers, Central Portola Valley is prime for outdoor activities with its equestrian and bike trails running throughout the expansive neighborhood. There are also several nearby open space preserves allowing for diverse hiking experiences, as well as private swim and tennis clubs for social residents. Yet, with all of these unique qualities, the average price per square foot of homes in Central Portola Valley is still drastically lower than those in Palo Alto neighborhoods. For example, Old Palo Alto, Palo Alto’s equivalent in affluence to Central Portola Valley, has an average price per square foot of $1,707 year to date, while Central Portola Valley’s year to date average price per square foot is only $1,035, almost $700 lower. Additionally, lot sizes in Central Portola Valley are drastically larger than those in Old Palo Alto, yet are similar in price. For these many reasons, DeLeon Realty projects Central Portola Valley to be the next location to see a wave of appreciation as Silicon Valley buyers start to see the value of homes in this neighborhood, and as Ladera owners begin to capitalize on their appreciation and trade up, buying a prominent Central Portola Valley estate.
JANUARY 2015 DeLeon Insight 12
Birdland Appreciation LEANNA SCOTT, DELEON SUNNYVALE SPECIALIST
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EL CAMINO REAL
HOMESTEAD RD
LAWRENCE EXPY
INVERNESS WAY QUAIL AVE
The median sales price has increased with a rise in appreciation in Birdland.
dynamic of this market is that some sellers are choosing not to sell because they are fearful of not being able to find a comparable, affordable replacement home, keeping the inventory low. In the last three years, there has been an influx of major tech companies locating in Sunnyvale including LinkedIn, Google, and Apple. In July, LinkedIn leased 580,000 square feet of office space on North Mathilda Avenue for 2,900 employees. Google took over Juniper Network’s lease of 270,000 square feet on North Mathilda Avenue as well. Apple’s new Spaceship Campus, or Campus 2, is located at the Cupertino/Sunnyvale border on Homestead Avenue between Wolfe Road and Tantau Avenue. Slated for completion in 2016, the 2.8 million square foot campus will house 13,200 employees. Located just across Homestead Avenue from Campus 2, Birdland Neighborhood is uniquely positioned to reap the benefit of Apple’s relocation with even greater home value appreciation in the next five years. Even before the conception of Campus 2, the desirability of Birdland was high because it is served by two of the highest performing elementary schools in Sunnyvale: Stocklmeir and Laurelwood, both with Academic Performance Index (API) scores above 940. With its golden convergence of superior schools and prime proximity to Spaceship Campus, DeLeon Realty projects the
WOLFE RD
unnyvale home values have soared since 2011. This phenomenon is especially noticeable in one of the most sought-after neighborhoods in Sunnyvale, Birdland. The median sales price in Birdland also jumped from $1,126,500 in 2013 to $1,394,000 in 2014 as of October, reflecting a 23 percent increase. DeLeon Realty projects that Birdland will experience continued appreciation in the next five years. This dramatic appreciation is a result of both macroeconomic and microeconomic factors. Historically low mortgage interest rates, low housing inventory, and the recent influx of major tech companies have all contributed. Lower mortgage rates continue with 30-year fixed mortgage interest rates hovering around four percent, allowing buyers to qualify for larger loans. Low inventory prevails despite an increase in home prices; it is natural to expect more homeowners would be enticed to sell. But, in Birdland, this is not the case in 2014. Only 102 homes were sold in 2012, and 106 in 2013. As of November 2014, year-to-date, that number fell to 74. The explanation of this decline is somewhat counterintuitive but has significant impact. It is reasonable to assume that the higher price point decreases the number of people who can buy. However, the large number of offers for a home suggests that there were plenty of buyers who could and would buy at a higher price level. The counterintuitive
BIRDLAND SUNNYVALE
HWY 280
appreciation of Birdland homes to outpace and outlast other desirable Sunnyvale neighborhoods. Expect median sales price to rise another 17 to 25 percent, putting prices at approximately $1,661,000 to $1,775,500 by 2017. Further, it is likely to continue to rise even beyond 2017 as Apple employees resituate themselves to be closer to work. 25 0.25 23.8%
$1,600,000 $1,400,000 $1,200,000
18.5%
$1,000,000
20 0.2 15 0.15
$800,000 $600,000
8.7%
$400,000
50.05
$200,000
00
$0 2012
13 DeLeon Insight JANUARY 2015
0.1 10
2013
2014 YTD
median sale price % change appreciation
PRSRT STD ECRWSS U. S. Postage Paid Palo Alto, CA Permit No. 1
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DeLeon Realty 2600 El Camino Real, Suite 110 Palo Alto, CA 94306
LOCAL POSTAL CUSTOMER
Preparing for a Spring Listing Thursday, February 12, 2015 6:00 - 8:00 p.m. Please join DeLeon Realty for a seminar focused on the upcoming Spring 2015 market in Silicon Valley. You will gain invaluable insight into the real estate market from the most successful real estate agent in Silicon Valley, Ken DeLeon. Also, meet Michael Repka, our managing broker and general counsel, and DeLeon Realty’s talented area specialists, who focus on specific neighborhoods throughout Silicon Valley.
Venue: Palo Alto Hills Golf & Country Club, Grand Ballroom 3000 Alexis Drive, Palo Alto
To RSVP, please contact Anastasia Koroleva at 650.543.8505 anastasia@deleonrealty.com
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650.543.8500 | www.deleonrealty.com | CalBRE #01903224