The DeLeon Insight - May 2015

The DeLeon Insight Silicon Valley Real Estate Local Specialization

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Global Reach

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Integrated Approach May 201 5

Conflicts of Interest in The Real Estate Industry • “Affordable” Housing Options

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• Unlocking Value Before You Sell • Neighborhood Spotlight – Los Altos’ Country Club

May 2015 DeLeon Insight 1

www.deleonrealty.com

The DeLeon Update: Market Trends

Tax Concerns Contribute to Housing Inventory Shortage

Change in Average Sales Price 2014 & 2015

By: Michael Repka, Esq. DeLeon CEO/Managing Broker

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01/2014 -4/30/2014

01/2015 - 4/15/2015

The change in average sales price for single family homes comparing 1/2015 to 4/15/2015 to the same period in 2014.

Change in Average Price/Square Foot 2014 & 2015

01/2014 - 4/30/2014

etween the demands of the federal government and the State of California, the “Tax Man” has played a key role in the current housing shortage in Silicon Valley. Although area real estate has been a remarkably good investment over the past 30 years, the sale of one highly appreciated property can result in a tax on the gain at a maximum marginal rate of over 37%. Yikes!

To make matters worse, the low property tax payments enjoyed by many long-time homeowners usually disappear when their properties are sold. Therefore, it is not surprising that many homeowners are reluctant to put their homes on the market.

The reduced inventory naturally exacerbates the problem by driving up prices, leading to even bigger tax bites.

But don’t fret. Some solutions remain if you plan in advance and understand the rules. Generally, three tools should be considered when trying to reduce or eliminate your tax hit, but each comes with strings attached. Specifically, these solutions are as follows: (1) like-kind exchanges, (2) installment sales, and (3) the transfer of

property tax base year value (Propositions 60 and 90).

Like-Kind Exchanges The federal government and the State of California provide for the deferral of tax when a taxpayer exchanges investment or business real property for other real property that will be used as investment or business property. Although a primary residence doesn’t qualify, a taxpayer may convert a home into investment property by renting it out for a sufficient period of time and then performing an exchange. While a number of strictly applied rules and deadlines accompany this procedure, they are fairly easy to follow.

This is a particularly good tool to use if the owner prefers the steady stream of income associated with a different type of property, such as a low-hassle triple net commercial lease. Also, all of the accumulated taxes will be forgiven if the property is properly held until the owner’s death. Although dying is a high price to pay for tax savings, it is better than having to pay a lot of taxes first, and then dying anyway.

Installment Sales Foreign buyers represent a significant portion of the buyer pool. Many foreign buyers pay cash for their homes, which makes sense given the challenges associated with obtaining financing in a foreign country. However, some buyers will pay even more if the sellers are willing to hold the financing. If properly structured (e.g., 50 percent down and a well-drafted security interest), this may result in a higher price, higher return on the lent funds, and lower taxes, which are also partially deferred.

Propositions 60 and 90 If a taxpayer is over 55 years old, Prop 60 provides that he or she may be able to transfer lower property tax payments on an existing home to a new primary residence, provided the property is in the same county and is less expensive than the one being replaced. Prop 90 expands this rule to include a handful of reciprocating counties, as well.

Although these tools are not suitable for every situation, they can each save certain sellers a lot of money. But be careful as a misstep may be very costly. Make sure your real estate agent is well-versed on the nuances of these rules, and don’t be afraid to check with tax professionals (they are actually very nice people).

01/2015 - 4/15/2015

The change in average price per square foot for single family homes comparing 1/2015 to 4/15/2015 to the same period in 2014. *Data gathered from the Multiple Listing Service on 4/15/2015

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“Affordable” Housing Options By: Ken DeLeon & Holly Nugent DeLeon Founder, DeLeon Listing Specialist

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ith housing prices at an astronomical high, many young Bay Area couples have found themselves “priced out” of the neighborhoods in which they would like to raise their families. Though a couple may have two strong salaries and are able to scrape together a down payment to purchase a home with a price tag between $1M and $1.2M, they are often disappointed by what that amount buys in prime Silicon Valley neighborhoods. So where can these young couples find a good home? Are there local “starter” neighborhoods where a typical working couple without millions to spend can settle down and raise a family? The answer is, “YES!” In the prized Menlo Park (Laurel Elementary) School District, the Flood Park Triangle is an often overlooked, yet affordable, neighborhood. Quaint, treelined streets with flat sidewalks line this charming neighborhood full of 3 bed/1 bath starter homes, often priced at just over $1M. This pocket not only offers an excellent Menlo Park address and access to great schools, but it is also an excellent commuter location given its close proximity to U.S. 101. Just west of the 101, this neighborhood is much more desirable than

its Belle Haven counterpart on the other side of the highway, and also boasts close proximity to Facebook.

Another charming neighborhood that is often overlooked by starter-home shoppers is the Redwood City/North Atherton border area, just south of Woodside Road. Here, small homes can sometimes sell for under $1.25M, and these homes border the most expensive zip code in the country. Also a great commuter community with excellent proximity to I-280, this neighborhood has many homes purchased for lot value and then redeveloped, making it a wonderful investment neighborhood. Right now, a couple may take advantage of low interest rates and reasonably low prices by buying a 2 bed/1 bath starter home in this neighborhood with the option to redevelop and build a larger home on the lot later in the future.

Often left out of consideration because of its comparatively remote location, the Skyline area of Woodside also offers beautiful homes at starter prices for couples who want a mountain retreat, only minutes from Silicon Valley and 280. If you don’t mind braving the winding roads, this peaceful country setting affords buyers a much larger home for budgets between $1.2M and $1.5M than they would even dream of finding in the flat neighborhoods of Silicon Valley. Additionally, the

This DeLeon Property in Flood Park sold for $1,530,000

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privacy and wooded landscape give the impression of living worlds away from the stress of everyday life in the bustling tech community.

Spurred by the stunning revitalization of downtown Redwood City, we also find that young couples covet the charming bungalows of the Mount Carmel neighborhood of Redwood City. Why wouldn’t they? In addition to its close proximity to downtown Redwood City’s restaurants and nightlife, Mount Carmel features homes that boast unparalleled charm, while tree-lined streets with young moms pushing strollers give this area a community feel of a bygone age.

Other neighborhoods that occasionally offer starter-priced homes with all of the desirable qualities of the best Silicon Valley neighborhoods include Emerald Hills, North Fair Oaks, Los Trancos Woods in Portola Valley, Allied Arts in Menlo Park, and, sometimes, even College Terrace in Palo Alto.

As young couples fight their way through the maze of limited inventory and multiple offers in the hopes of locking in their dream homes before interest rates rise, we recommend keeping a close eye on these neighborhoods, which we believe may have great equity potential.

Neighborhood Spotlight – Los Altos’ Country Club By: Ken DeLeon DeLeon Founder

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any buyers overlook one of the most beautiful areas of Los Altos—the Country Club neighborhood. Either because of the relatively hilly and windy streets or the area’s location on the west side of Foothill Expressway, this area does not always appear on everyone’s radar screen. It is definitely worth a look!

The area is named for the private Los Altos Golf and Country Club, which was built in 1923 and has recently undergone a fantastic renovation. The club features golf, tennis, aquatics, a fitness center, and great dining venues. Although elegant, the club retains a warm charm that echoes the character of many of the homes in the area.

This neighborhood is nestled between Foothill Expressway and I-280, south of Magdalena Avenue and north of Permanente Creek. Perched along the foothills of the San Antonio Open Space Preserve, the area enjoys access to many hiking and recreational activities. It has been developed on unincorporated Santa Clara County land, which means homes here are subject to slightly different building regulations when compared to homes in other parts of Los Altos.

The neighborhood is a blend of charming homes built in the 1940s and stunning, newer constructions. Given the large lots, often in excess of one half-acre, we expect that this area will see steady appreciation in the foreseeable future. However, some homes do experience vehicular noise due to the proximity of Foothill Expressway and Route 280.

Children living in the Country Club area attend Loyola Elementary and Blach Intermediate, both with great API scores, and Mountain View High, which has a competitive API score. Although Mountain View High’s API ranking is a step below those of Los Altos High and Palo Alto’s Gunn and Paly, we are forecasting upward movement by Mountain View High over the next five years. Additionally, there are many great private school options located near this area, including Pinewood, St.

Simon, and the Waldorf School of the Peninsula.

Another feature that many of my buyers like about this area is its excellent location.

The neighborhood has easy access to Routes 280 and 85, and it is near both the shops and restaurants along Foothill Expressway and the charming downtown area of Los

Altos.

If you are interested in beautiful and convenient homes with above-average appreciation potential, you may want to check out the Country Club neighborhood of Los Altos.

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Real Estate Matters— Conflicts of Interest By: Michael Repka, Esq. DeLeon CEO/Managing Broker

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lthough the practice is completely legal and widely accepted in California, it seems impossible for one real estate agent to zealously represent both the buyer and the seller in the same transaction, even when the situation is properly disclosed. Simply too much conflict of interest exists.

Nevertheless, many agents are tempted by the thought of getting twice the commission from the same transaction, and many clients accept this practice, not realizing how much more other agents’ clients might have been willing to pay.

In practice, some agents even offer a commission discount if the sellers pick their offers. This is a violation of the rules that apply to Realtors® if not properly disclosed to other interested buyers in advance in the MLS, which is rarely done. A good attorney would cringe at the notion of representing both the plaintiff and the defendant on the same case, yet many real estate agents

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represent both sides without even blinking an eye.

Fundamentally, there are three problems with “double-ending” a deal. First, a good agent knows a lot about the client’s situation and has access to a lot of confidential information. Second, an agent cannot possibly fight for the highest price for the seller while also advocating for the lowest price for the buyer.

Third, there is a risk that a listing agent will not do everything possible to bring in competing offers when that agent already has a buyer.

The underlying conflict stems from the commission model that is widely used in the real estate industry. Most agents successfully close only a limited number of transactions per year, but they are paid extremely well when they do make a sale. Thus, the difference between two transactions and three transactions has a material impact on an agent’s annual income. You must also consider that much of the first sales commission goes towards an agent’s business expenses, such as monthly

fees to the affiliated office, dues to MLS and Realtor® associations, and advertising to get new clients. Do the math and you will see why so many agents are willing to represent both the buyer and seller. A less obvious problem occurs when a listing agent finds a buyer and then gets a friend to write up the offer, often taking a large, and generally undisclosed, referral fee. In many ways, this

is an even worse set-up because the sellers do not know they should be on guard.

One problem that makes it hard to fix the flawed dual agency situation in California is the definition of dual agency itself. Any transaction in which the listing agent and the buyer’s agent are licensed under the same managing broker is classified as dual agency. This may be overly broad because, in most offices, the agents are independent contractors who operate with very little interaction. Put another way,

independent agents in a particular office compete against each other in the same way they compete against agents who pay to be affiliated with another office. Generally, there is no financial incentive for an agent to accept an offer from another agent in the same office unless the listing agent referred the client. However, there is a large incentive for unethical conduct when an agent receives commission (or a referral fee) if a personal client gets the home.

Most agents are good people, but the commission-based model creates the temptation to put their finger on the scale. By way of example, assume a home has been on the market for a few weeks.

Three somewhat interested parties circle the opportunity, then one party decides to submit an offer. A good agent would inform every interested party to stir up some competition and generate a higher price, but those calls may never be made by a listing agent who is submitting an offer for a personal client. At its core, the problem is that the agent has two clients with directly opposing interests. On the one hand, the agent should be doing everything they can to get their buyer the home for the lowest possible price. Naturally, that would include avoiding competition that would drive up the price so they would be influenced not to make the calls. On the other hand, the agent should be doing everything possible to get the seller the highest possible price, which would include updating all other agents. Clearly, there is a conflict that prevents the agent from doing what is best for both clients.

Short of lobbying to get the law changed, here are a few ways wise clients may protect themselves: • Make sure you get a copy of every offer that is submitted, including the buyer’s agent’s name and contact info, along with any correspondence.

• Ask that any offers submitted in person are also emailed so there is an electronic record.

• Ask for the name and phone number of every agent who downloaded the disclosures.

• Request a log of the listing agent’s follow-up with all interested agents.

• Require written disclosure of any commission, referral fees, or other financial incentives to the listing agent based on the acceptance of any particular offer.

Generally, sellers get the short end of the stick when it comes to dual representation, which may cause buyers to conclude they will have a competitive advantage if working with the listing agents. Initially, this sentiment is logical, but you must ask yourself, “Do I really want to trust this agent to help me when I am attracted to the agent only because I think this agent might mess over the other client?”

Another latent problem that comes up is that most agents represent both buyers and sellers at the same time. Unfortunately, most offer dates are set for either Wednesday

or Thursday in this area. Therefore, some agents find themselves scrambling to get an offer on another property ready on the same day that they are accepting offers on one of their listings. While this isn’t exactly a conflict of interest, it certainly can create a conflict of time.

At DeLeon Realty, we keep complete separation between the listing side of the company, headed by the author, and the buyer side of the company, headed by Ken DeLeon. In fact, the two teams are located on different floors and have separate support staffs. At DeLeon Realty, we believe all clients deserve complete loyalty from the person with whom they decide to place their trust.

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Unlocking Value Before You Sell By: Michael Repka, Esq. DeLeon CEO/Managing Broker

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n the March edition of the DeLeon Insight, we examined “fixer-uppers” as an opportunity for buyers to get a relative value in this red-hot sellers’ market. In this article, we will look at ways in which prospective sellers can make sure they aren’t the ones selling their home at a “relative value.” In other words, we answer the question, “How can sellers make sure they get the maximum sales price for their home?”

Staging is very important (that is why DeLeon Realty pays for it), but staging alone is not enough. In this market, many buyers are busy professionals, or from outside the country, and they will pay a premium for a turn-key property. Therefore, before bringing their homes on the market, wise sellers will look at their properties through the eyes of the modern buyer. Ask yourself, “Is my home move-in ready?” If not, explore what low-cost (or no-cost) steps can be taken to make your home more attractive.

Before the DeLeon team lists a home, we send in a contractor and an interior designer to pre-inspect the listing. Although Ken DeLeon and I have a lot of experience in real estate, there is no way a broker will have the same vision as a great interior designer.

Similarly, our in-house contractors and handymen can identify, and even fix, some items that may discourage buyers.

The types of improvements that tend to pay the highest return include fixing broken items; oiling and realigning drawers, doors, and cabinets; painting; refinishing floors; trimming bushes and trees; and replacing knobs and handles.

On the other hand, larger and more personal projects are better left to the buyer.

To make sure that buyers aren’t scared off by the scope of these larger projects, we have a construction consultant, Curt Sramek, on staff. Curt can work with buyers of DeLeon listings, or DeLeon clients who buy

Vacation Areas Poised for Strong Real Estate Appreciation By: Michael Repka, Esq. DeLeon CEO/Managing Broker

O any home, to determine which projects to undertake and identify the right contractor for the project. Like all DeLeon personnel, we do not charge for a consultation with Curt.

Buyers have to pay a lot of money to buy a home in this hot market, so they are naturally going to gravitate towards homes that look the best. It is important that your home is properly prepped, staged, filmed, and photographed in such a way that visitors can imagine themselves living there.

ver the past year or so, there has been a marked increase in people selling their Bay Area homes and moving to certain easily accessible geta-way locations. In addition to offering a refreshing change of pace, many of these areas also offer a tempting arbitrage opportunity.

When compared to prime parts of Silicon Valley, vacation areas like Lake Tahoe, Carmel, and Sonoma and Napa Counties were hit far harder by the economic downturn five years ago, and they bounced back more slowly. This has created a huge disparity in home prices.

The current lack of homes on the market for sale, or inventory, has led to a remarkably strong sellers’ market, leaving some homeowners tempted to cash in.

However, that same hot local sellers’ market leads to inertia. After all, what is the point of selling for big bucks if you would have to plow it right back into a new property?

For some, the answer is to sell their highly

appreciated homes and move somewhere more affordable.

The nice aspect of this plan is that the vacation home market is showing very strong signs of life. Most people are feeling pretty confident about their financial futures, which may lead them to consider buying vacation homes. We expect this trend to continue, which should fuel further appreciation of the vacation home market.

Out of the nearest top vacation areas, we have seen the strongest trend towards areas in and around Carmel. The combination of relatively low prices, close proximity to the Bay Area, and a beautiful setting proves

to be a powerful attraction for many. These considerations, plus an optimistic view of the area’s likely appreciation, influenced Ken DeLeon’s decision to purchase a property on the beach in Carmel Highlands.

Although DeLeon Realty does not represent buyers or sellers in any of these vacation markets, we have found this trend interesting. Irrespective of whether someone is looking to buy a vacation home or to sell an appreciated property and move to a different area, we believe that the upward trend in home prices in these vacation areas will continue for the next five to seven years.

2014 Market Share1 1/1/14 to 12/31/14 #1 #1 #1 #1

#2 Overall - Silicon Valley #2 2 Overall - Our Cities #3 Palo Alto #4 Menlo Park #5

Atherton Mountain View Los Altos Hills Los Altos Portola Valley

1 These rankings come directly from BrokerMetrics, an independent third party that compiles information directly from the Multiple Listing Service (“MLS”) for the period January 1, 2014 to December 31, 2014 2 Includes Palo Alto, Menlo Park, Atherton, Los Altos, Los Altos Hills, Mountain View, and Portola Valley.

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201 Mountain Wood Lane

Premier Opportunity to Build Equestrian Estate Listed at $39,900,000 Tucked away in prestigious Woodside, a private road leads to the gates of two adjacent parcels, offering a combination of over 11 oak-lined acres (per entitlements summary) that spread amidst some of the country’s most illustrious properties. Famed architect Michael G. Imber and world-renowned landscape architect Robert E. Truskowski have collaborated to ensure these private grounds, which include the historic stables of Champagne Paddocks, retain their timeless charm while balancing a country estate brimming with modern luxuries. Despite this country estate’s rustic environment, you will be less than five minutes from the center of Woodside, one of the most charming and affluent towns in the world. Nearby schools include Woodside School (K-8) (API 965), Woodside High, Phillips Brooks School, and Woodside Priory.

www.201MountainWood.com

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DeLeon Market Conditions Atherton Snapshot

Cupertino Snapshot

Los Altos Snapshot

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DeLeon Market Conditions Los Altos Hills Snapshot

Menlo Park Snapshot

Mountain View Snapshot

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List your home with

DeLeon Market Conditions

DeLeon Realty

Palo Alto Snapshot

Portola Valley Snapshot

Woodside Snapshot

DeLeon Realty will cover all of the following at no additional charge: • Staging* • Property Inspection • Pest Inspection

*Includes: Design, Installation, 1 Month of Furniture Rental and Removal

Our clients love the personal attention they receive from Michael Repka, from beginning to end. Additionally, you will receive a suite of free services from the DeLeon Team, including interior design, construction consulting, handyman work, and dedicated marketing to local and foreign buyers.

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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

Tax Issues Relating to Real Property Thursday, June 18th, 2015 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.

To RSVP, please contact Lena Nguyen at 650.543.8500 Lena@deleonrealty.com

Venue: Palo Alto Hills Golf & Country Club, Grand Ballroom 3000 Alexis Drive, Palo Alto

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16 DeLeon Insight May 2015 650.543.8500 | www.deleonrealty.com | CalBRE #01903224