March 2008 Quarterly Newsletter

Volume 3, Issue 1

Nicholas French, Broker Associate, CRS

March 1, 2008

Quarterly Review The Golden Goose - Bay Area Rental Property? Inside this issue: The Golden Goose Bay Area Rental Prop-

1

All That Rate Talk - Fed 2 Rate & Conforming Client Testimonial— Doris Eng

2

Foreclosure Mania

3

(cont) All That Rate Talk ...

3

Top 10 Rental Rates on 3 the Rise Our Local Market

3

(cont) The Golden Goose - Bay Area Rental Property?

4

Record Retention

4

Money Saving Tip

4

Nicholas French Broker Associate, CRS 4906 El Camino Real #2 Los Altos, CA 94022 650 773 8000 (cell) 650 961 2338 (office) 650 961 5238 (fax) [email protected]

During these uncertain economic times some investors are looking for the safest haven for their money. Some thought they’d hedge the market with McDonald’s stock, but that is down from $63 in December to about $51 in late January. Others look to bonds and treasuries and some even stick their dollars bills under the mattress. Finding the right place for your investment money is arguably one of the most difficult tasks at hand. I decided to write this article because at one time or another many of my clients have considered rental property; over the past few years I have generally suggested to wait unless there was a pressing issue like an exchange in process. Some people looked at other locations such as Florida, Arizona and the Central Valley to buy speculative or rental properties – I was not a fan of this strategy for reasons such as the unsustainable market and the lack of control over the investment. It is now time to reevaluate the rental property investment as I am sure this is timely for some of my clients. Each investor is going to have a particular strategy. Some of my clients buy homes with a view, while others buy only multi-units and others mainly downtown locations. When considering investment property you have to take off your personal residence hat because the direction of the house, natural light, and type of roof are not generally main considerations for the property. We are focusing on its investment value mainly cash generation and growth, i.e. dividends and earnings. The cash flow of your investment is fundamental for obvious reasons. You want to make sure your investment is covering itself or produces a net gain for your risk. I created a spreadsheet several years back where I plug in all of the relevant information about a property and it shows me the cash situation. Then I can make a fairly clear calculation on whether it is a good cash property to consider. Many investors took the strategy of cash flow and purchased only the properties, mainly out of state, that generated the greatest cash flow return. This was a safe bet because the cash outlay was less than the return, but these areas with the largest cash flow typically have lower growth. I compiled a group of popular purchasing locations for rentals compared to Santa Clara County area using the annual percentage change of the housing price index provided by the OFHEO. The data shows that our area has greater increases than most other regions suggesting that we have the greatest appreciation over time. But if cash flow is the strategy then you will be focused on the lower growth regions. The cash flow strategy may be heavily weighted on the length of time you intend to keep the investment and when you need to pull from your principal. This approach focuses on the now, but does not necessarily focus on the growth. If you are a young investor looking for a long term investment and do not need immediate cash you may just look in your backyard for the next investment. My particular strategy is to purchase property that covers itself with twenty to thirty percent down payment in an area with an ample renter pool and allow the growth to compound my investment in a market with strong rental rates. There is even an argument for a negative return property that has high anticipated growth. The growth side of real estate is a powerful investment strategy; these areas typically have stronger rental markets and rising rents. According to BusinessWeek, in the latter part of 2007, the Top 10 rental markets on the rise included San Francisco and San Jose in the top two spots, Oakland in fifth and Orange County finishing in sixth. We are seeing rents consistently going up, so if you have local rental property and have not looked at your rates this may be a good time for an evaluation. Unfortunately for those with rentals in the “bubble” areas, they are seeing (cont. pg.4)

Quarterly Review Page 2

Client Testimonial— Doris Eng I was referred to Nick by my friend and after our initial meeting I knew Nick was right for the job. Nick made the entire process work seamlessly and stress-free for me. I know he worked very hard to make deliverables happen and providing an excellent level of service. From coordinating the landscaper, painter, interior designer to referring mortgage broker, insurance and mover, the entire team was top notch! He is professional and competent; he gave an evaluation of the overall market, which he compared to my selling area and set realistic expectations regarding the sale. I trust Nick’s judgment and I appreciated the opportunity to work with him. I admire his level of integrity, best practices and I’m very happy with the results! He’s the Best! And he’s a nice guy too!

All That Rate Talk - Fed Rate & Conforming Limits The Fed has aggressively lowered the interest rate over the past few months in an attempt to stimulate the economy while the government has signed a stimulus package, which includes increasing the conforming loan rate limit based on median home prices. These recent actions are setting the stage for the economic outlook while also exposing opportunities for investing. Fortunately or unfortunately, depending on your perspective, not every region is affected by economic swings equally. Most will agree that Detroit’s current unemployment and economic dilemmas are having a greater impact on the local economy than issues in the Silicon Valley. We’ve seen some layoffs from top companies, some real estate slowing, and some slowing in consumer spending, but I still see the freeway traffic line going to Valley Fair on the weekends or the crowds at Stanford Shopping Center. There is more to the market than just an interest rate change, so let’s break down a few of the important issues currently on the horizon. How does the Federal Funds Rate affect mortgage rates? When the Fed adjusts the interest rate it is intended to maintain a healthy economy, so is the purpose. Some argue that fending off inflation is the number one issue for the Fed, while others question its existence. All theories and criticisms aside, when the Fed adjusts interest rates it is commonly felt that mortgage interest rates adjust accordingly; it is not this cut and dry. There are many variables associated with mortgage rates including: liquidity, secondary markets (Wall Street), forecasting, and of course supply and demand to name a few. The Fed recently stated that “Mortgage borrowers need to be conscious of the fact that fixed mortgage interest rates frequently tend to rise after the Fed has trimmed short-term interest rates….and a growing economy, especially at a time of inflation concern, tends to press interest rates upward.” Each word from the Fed is carefully scrutinized by Wall Street and other financial businesses and their market observations and monetary policy adjustments do influence the cost of money, however, interest rates such as the Prime Rate do adjust independently of the Fed interest rates adjustments. The financial markets look at several variables including the Federal Reserve when making adjustments to interest rates making knowledge of the overall economic picture important when forecasting your investment strategy. Is the stimulus package really going to save the national real estate market? It sure sounds good in theory; if you are in a high-cost region Fannie Mae and Freddie Mac are going to have increases of up to 125% (maximum of $729,750) over the median home price whereas the current limit is $417,000 to make your loan conforming and government protected. Sounds great in theory, but it is not as simple as just changing the limit and having that great conforming rate instead of jumbo with the lower rate. Now that the stimulus package is signed the government has to first determine the median home prices for every region in the country. The Department of Housing and Urban Development has this challenge and a 30day window to publish the results. Concurrently, the Office of Federal Housing Enterprise Oversight must (cont. pg 3)

Volume 3, Issue 1 Page 3

Foreclosure Mania The big talk around town is buying foreclosures. But is it really as simple as buying a typical property? I spent 2007 learning, researching and attending the Santa Clara County auctions, so I can tell you firsthand about the process, benefits, and pitfalls to foreclosure buying. First, the whole foreclosure word is thrown around when in fact many properties aren’t technically sold as foreclosures. A property may go through steps prior and post foreclosure. A pre-foreclosure, or notice of default, occurs after a Borrower fails to make the mortgage payment and the Lender sends a notice stating that if they may be subject to foreclosure proceedings. The Borrower can decide to make the payment, put the house up for sale or in extreme cases walk away when there is no equity. If they owe more than the house is worth they may do what is known as a short sale, or pay the lender short in order to avoid foreclosure; the Lender is not required to take this option. If the Borrower does not pay after a lengthy period the Lender will begin and consummate foreclosure proceedings. At practically every stage the Borrower can stop the process by negotiating payment. Assuming the property goes to auction you will find a group of individuals on the courthouse steps rain or shine to bid on the property. Prior to this date, savvy buyers do research on the property to evaluate equity, if any, and do a drive by to estimate the condition. Imagine buying a home and closing with no financing (100% down), interior unseen, condition and inspections unknown and most likely a disgruntled tenant that you have to evict. This is the case when buying on the court steps. It is risky business with a good return if you have the stomach; most of the people who buy these properties get a rush from the risk and buy and sell these properties as a living. 2007 Santa Clara County Foreclosure Statistics It is not a strategy for most investors. Keep in Notices of New Trustee mind that most of the foreclosures in 2007 were Year Defaults Sales REOs SOLD properties with little to negative equity, therefore not being sold at the court steps and going 2007 6142 3591 1551 173 back to the Lender becoming REO property (real 2006 2703 838 157 109 estate owned). This is generally the point when you see the foreclosed and now REO properties being sold through the Multiple Listing Service. This is the abbreviated version of the foreclosure process, but I thought it would be helpful to get the conversation going. Foreclosures can be a good investment if you have the time, knowledge, cash, and risk tolerance, but frankly you can generally find a safer property through the normal process and in many areas find motivated sellers (mainly central, east and south San Jose, Morgan Hill, Gilroy). Feel free to contact me anytime to learn more about the foreclosure process specifics.

(cont) All That Rate Talk ... determine the requirements for the new loan amounts; whether adjustable rate, interest-only mortgages or 2-4 unit loans will be included is yet to be determined. Presumably, the requirements will be tightened showing more caution towards the higher limits with possibly higher down payments, credit ratings, and fees. The monetary return may be greater with the increased risk. Once the fundamentals are decided and the administrative issues resolved, such as updating all of the underwriting systems, we will see if Wall Street wants to buy these higher limit loans. There is no guarantee these higher limit loans will be purchased in the secondary markets and with potentially billions of dollars in losses for Fannie Mae and Freddie Mac on the horizon with the current mortgage turmoil we will see if investors buy this newer product of higher-valued loans. Either way we are yet to know if the newer conforming guidelines will contribute to lower than the current jumbo rates. Let’s be optimistic and of course I will stay on top of the changes.

Top 10 Rental Rates on the Rise: Q1 - Q2 % Increase San Francisco 4.4% San Jose 2.4% New York City 2.1% Seattle 2% Oakland/East Bay 1.8% Orange County 1.7% Washington D.C. 1.7% Baltimore 1.7% New Haven 1.6% Philadelphia 1.6% Source: BusinessWeek Q2 CY07 results

Our Local Market Q4 2006—Q4 2007 While Santa Clara County is experiencing declines in the average home prices our local issue continues to be mainly volume. We are experiencing slower growth, but exceeding other regions. The urgency is not as obvious in the market, which is good all around.

City

Vol %

Atherton

DOM Med % Price %

-4.5% -67.1%

6.1%

Cupertino 14.3% -19.6%

2.7%

Los Altos -30.0% -27.3%

7.0%

LAH

-42.9% -60.1%

9.4%

Menlo

-19.1% -18.4%

0.8%

Palo Alto -21.4% -40.0% 19.9% Saratoga

22.4% -43.8%

0.0%

Sunnyvale -29.7% -10.5% 11.8%

Record Retention Tax Records anything you need to

(cont) The Golden Goose - Bay Area Rental Property? the opposite happen with rents; the many speculative buyers with the one-year ARMs adjusting are frantically competing to rent out their properties lowering the rates in these areas. So even though the numbers looked good you don’t want to forget about the vacancy factor and rent adjustments. Having a property in a strong rental area goes a long way to protect your investment and sanity.

support your tax return: 1099s, W-2s, receipts or investment states - 7 Years Medical Bills - 3 Years Safe Deposit Box Inventory - Update Annually Insurance Records - all

Which strategy should you take and is it a good time to make your move? Your strategic direction should be influenced by your investment tolerance, cash return and timeline. If you are in a position where you need the cash flow for your investment possibly because you are preparing for retirement, a strong consideration will be areas with the greatest cash flow and potentially lower growth. If you have a longer time horizon and do not need the immediate cash you have the ability to consider the growth strategy. Either option can be beneficial for your portfolio; analyze your options carefully, talk to professionals such as your CPA and Financial Advisor and make a sound decision. I am not necessarily suggesting going out tomorrow and buy an apartment building, but it is good to understand these two approaches and to keep an open mind. The biggest shift that I am seeing in our local market is the lack of urgency to buy real estate, which I think is positive. I work with my clients to focus on the value-proposition and not have the urgency thinking that tomorrow they will be priced out. I will close with one of my favorite sayings that Ricky Roma so eloquently stated in Glengarry Glen Ross: “I subscribe to the law of contrary public opinion... If everyone thinks one thing, then I say, bet the other way...”

policies and related documents - 4 Years after expiration of policy

Annual Percentage Change - Housing Price Index (MSA Regions) 35.00 Charleston-North Charleston, SC Austin-Round Rock, TX

30.00

Phoenix-Mesa-Scottdale, AZ Salt Lake City, UT

25.00

Seattle-Bellevue-Everett, WA (MSAD) San Jose-Sunnyvale-Santa Clara, CA

20.00

Money Saving Tip: 15.00

Have your spouse cut your hair to save on

10.00

the Barber. This is 5.00

especially cost0.00 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

effective for men with frequent haircuts.

-5.00

-10.00

Source: http://www.ofheo.gov

Please Send This Newsletter to My Family and Friends If you know someone who would like to receive this newsletter I would like to send it to them. Please either have them contact me or provide me their contact information and I will make contact. My goal is to have this newsletter add value and be an information source for my clients, family and friends. Please do not hesitate to contact me if I can help you with any real estate questions, strategies or if you are seeking quality representation.