Case-Shiller Index of Housing Prices - Double Dip?

The headlines today about the Case-Shiller Housing Index do not reflect what is going on in the Silicon Valley market.  Read the data from the actual Case-Schiller tables via this link. The bottom of the single family housing market for Santa Clara County is essentially March 2009.  The data that was released today is about March 2011 - the Index has a two month lag time so that the data can be compiled. Seasonally adjusted index for the San Francisco region is 134, compared to two years ago of 121. We are significantly positive over the last two years.  Also, consider that the data is for the SFO region which takes into account some more severely impacted areas of the East Bay.  If the data were strictly for Santa Clara County, the numbers would be even better.
Now this is not necessarily a rah rah of the Valley - when considering a purchase or a sale of real estate, we want to take into account all the possible factors - it's not just about price! 

Single tenant NNN investments, Ecuadorian dwarfs & DaVita Dialysis Centers

What do DaVita Dialysis Centers, a tribe of diminutive people in South America and your 1031 exchange into a single tenant NNN property have in common?

Let me start with this, do you remember buying your plane ticket at your local retail center where your trusted travel agent was located? Yes, it's been a while, perhaps some 15 years since they dominated the landscape of retail spaces. Now, you don't go buy a paper ticket next to the Starbucks, you buy it on your laptop at the Starbucks.

Do you remember the more recent local Blockbuster Video store or Hollywood Video store where you walked in a few times per week to rent your VHS (ok, that's too far back, insert DVD for you youngsters). Now on-demand video and Hulu reign supreme.

Were you at the Howard Hughes Center mall last night in the Border's book store which is having a store closing sale? Why this travesty? Think Amazon, Kindle and Ipad magazine e-scriptions.

Ok Mario, what's the theme here? maybe... Technology kills things!

...and it kills things in relation to your commercial real estate investment.

One of the hot single tenant NNN property classes for sale are the dialysis centers that are popping up all over the map - think DaVita Dialysis as the Kleenex in this category. Hundreds of new DaVita centers are being built in local neighborhoods to service the needs of patients with poorly functioning kidneys typically an effect of long term diabetes disease. The investment concept around the sale of these NNN investments is that the centers will be well frequented by their base of committed customers for decades on out.

I was explaining my understanding of this to my muse Julie this morning in the car and she recalled Ecuadorian dwarfs in South America. (please hang on, there is a circular connection coming soon)

Apparently in the last few days, an article was posted about this tribe in the Andes where the genetic make up of the tribe makes cancer and diabetes virtually non-existent. So, the medical research world has invaded the little tribe to find the medical fountain of youth (or at least the fountain of anti-carcinogen) When (not if) this gene is isolated and when the drug company gets FDA approval, some of these ailments will be eliminated or reduced.

I may be overly focused on my favorite group of people - the commercial investors out there - and my concern is that there may be empty DaVita Dialysis centers on the landscape one day in the future - or at least some renegotiated leases because their business will slide.

Therefore, as a suggestion for your next real estate investment move, stay clear of over-valued NNN deals that may not be the hot investment vehicle of the near future. Instead, consider the basics of coffee, the local Burger King and my favorite - Taco Bell - as a healthy investment alternative. In my opinion, as healthy or not as we seem to be becoming, the US appetite will always crave the Whopper.

San Jose Bank Owned Homes

I just did a search of future San Jose Bank Owned Homes based on a 5 mile radius scan of Notice of Trustee Sales. The parameters were, 5 mile radius of my office at Intero Santana Row and NTS within a 60 day period. The return was 775 homes scheduled for trustee sale in the next two months. Of course, many of these will be postponed due to short sale offers, bankruptcy filings and mutual agreements with lender & borrower to work through loan modification, etc. This is a very large number given the comparison to the approx 3,500 homes on the market in Santa Clara County. An additional 20% REO or short sale inventory will have a significant impact on pricing. Banks are being cautious not to flood the market. Although, some banks may decide to sell their inventory first at perhaps higher prices than waiting it out.

Feng Shui Issues in Selling Homes

Buyer's agent called me today, thrilled about my new listing. Her clients have been waiting for a townhome in that complex to come available. She even said they will write an offer this weekend once they see the inside. Then the agent asked me: Which direction does the front door face? I said North - in fact, I use my iPhone compass application on every home I sell. Sadly for me her clients will not buy a home that faces either North or South - that's 50% of the market! Now, not every buyer has these same directional allegiances - many home buyers love homes that face South - they tend to be sunnier - or North for the same reason if the living spaces are oriented to the back of the house. I tend to not like high rise condos with West facing views - you roast in those units in the summer afternoon. East facing is difficult if you want to sleep in on lazy Sunday mornings - or you invest in black-out blinds. Find me a house that rotates please! By the way, my desk faces South East - what does that mean?

Real Estate on it's Head in Silicon Valley

For a bank owned home in Silicon Valley - buyers should offer 10% over asking and better be "all cash" in order to beat the competition.
For a "normal" sale - buyers can offer 5-10% below asking and get favorable responses.
For a short sale - buyers can offer less than 10% below asking and get sellers quite thrilled to take that offer to their short selling lender.

Now don't quote me on this - this is NOT completely factual - actually very anecdotal - yet, ask most buyers, sellers and agents in this marketplace and that is typical of what is going on.

Why Wells Fargo bought Wachovia and not Washington Mutual

Great insight into why Wells Fargo bought Wachovia. I just read this article as I was searching for ways to get my client's Wells Fargo short sale approved. The banking industry of course is very influential to real estate and knowing why banks do certain moves is power. Eric Meyerson's blog Free Rise is outstanding. He is a banking industry insider and San Francisco area resident. Check him out.

Real Estate Market Segments and Good Moves

Common thought in the housing market is if you are selling a small home and buying a bigger home in the same market (let's say the South Bay) or doing the opposite by downsizing - then it doesn't matter if the market is a soft seller market or a hot seller market. High or low - you are simply trading across - a la the tide raises and lowers all boats...

True in a "normal" market. But is any market "normal"? And really - this market is not that at all. Because of specific abnormal issues affecting the market (lack of good first time buyer financing, REOs and short sales in abundance, decent financing for homes <$700,000 and ugly financing for anything above $1M, the condo market suffering HOA funding issues and lenders shying away from lending in those complexes, etc.) The market is segmented in ways that will allow certain buyers/sellers to gain over others.

The typical trade up buyer selling a small single family home or a townhome with the right criteria in the sub $700,000 range (that is not a short sale) will attract great buyer interest and sell at a very good price. That same client will also benefit very well as a buyer in the over $800,000 range due to a lack of buyers in that market and significant softness from REOs in certain areas (just look at what you can get in Evergreen/Silver Creek Country Club areas for $1M+ - VERY nice housing.

Every market has it's ideal moves, this market has ideal moves that are super-charged because of these highly unusual factors.

Condo Complexes in a World of Hurt

Perpetuated by rampant special assessments by Home Owner Associations that were never funded sufficiently, lenders are shying away from lending on these properties. FHA is currently revising it's guidelines with respect to "approving" certain condo complexes. The current situation is there are certain condo complexes that were built to FHA approval specifications. The one's that did not go through this process (most in the Bay Area because prices were way above what FHA would lend) had to get "spot" approvals. This took weeks and made FHA loans on these complexes far less attractive. Now it looks like all complexes will not have FHA approval and all will be required to be spot checked - ughh!!!
FHA was the one source for low down payment loans on condos recently - at 3.5%. Otherwise at least 15% down for conventional loans. If FHA becomes far more difficult to use, then far fewer buyers will be buying condos - not a good sign for a market that is already soft due to all the REOs and short sales.
Financing is key - and the single family home market is relatively firm because financing is readily available.
Is there an opportunity in the condo market - absolutely yes - but when, that's tough to say.
One complex is so underwater on Technology Drive, that listing agents are suggesting cash offers only!
That complex is 5 years old, had sold at prices above $500k for 2 bedroom units, now units are offered at $249,000, and many of the units are rentals, which is another major deterrent to lenders. Add the potential of a special assessment or HOA litigation and you have a true nightmare. Beautiful property too.

Appraisal Law Taking Values Lower

Ever since the new appraisal regulation came in to effect, it has made a significant impact on the value of homes. The law was enacted to place a separation between lender and appraiser. It was thought that an appraiser may be beholden to a specific lender who routinely gives them business. Some appraisers needed only one lender to fill their book of business. Can there be influence in a situation like this? - of course there can. Can lenders push appraisers to come in with appraisal values at or above the contract price? It doesn't seem unreasonable that this occurred.
What is happening now is perhaps backlash or maybe it is an adjustment to the right level or maybe it is a pendulum swinging way past where it should rest.
Lenders and Realtors now are at the mercy of an appraisal. These are normally completed a week or so before the purchase transaction is due to close. Now, we are crossing our fingers that the price comes in at or above the contract price (worsened by overly cautious appraisers and bank REO comps that sometimes are the only comps) and the conditions spelled out in the appraisal are not deal killers (examples - repair all termite work including Section 1, Section 2 and Further Inspections and repair/replace any and all items that the appraiser found faulty - remember we are selling homes that are 10-90 years old and then some).
How does this affect pricing? Easy - deals fall apart when a seller thought he had a home sold at a certain price and with certain repairs/costs to be absorbed. Now a week before closing, the seller is required to do major work to the property - sellers tend to object, buyers do the same and then deals fall apart. This means more time on the market, more inventory, more Days On Market, and eventually lower prices.
Was the law effective - yes - was it overly effective - probably yes too. If a lender is going to lend a home buyer a few hundred thousand dollars to buy a house - should that lender not be able to pick a trusted professional to appraise it's risk - I think so. Can this process be flawed - of course - but for a true laissez-faire believer - this is best. Ah well, we shall see how this plays out in the next year.

Technology and Real Estate

I know I've touched on this topic before and I truly believe it has very important investment impact for commercial property owners & investors. Why today though? Well, as a guy who is perhaps on the verge of becoming a relatively young tech dinosaur, this topic is close to my heart. Meeting a friend at Starbucks this morning, she wanted to give me some songs so I could update my Ipod workout playlist. I was handed a microscopic 4meg chip that she easily popped out of her smartphone. My one year old Blackberry had no apparent slot for this media card. I had to open the back plate, pull out the battery and then dig for the media card to take out. Obviously not a new enough smart phone for 2009! Also, today the big media buzz is about the new Palm Pre and the price slash on the 3G Apple IPhone.
My concern over technology and real estate is - not the "what happened to all the retail space taken by travel agencies" but now: What will this freedom and freeflow of information and entertainment do to how we live our lives and where we spend our money? I would like to throw this question out there and ask for ideas on where this will take our need for housing space, retail space and office space. Square feet per occupant has got to go down (just think of all the saved space when the tube tvs and rack stereo systems are replaced by a flatty and an ipod - yes I know this already happened...) and in the workplace everything is shrinking except the size of the employees (think better nutrition). Any thoughts? (See what a tall soy latte is capable of doing?)

My office partner Christine Kim and I attended a live home auction on Tuesday in San Jose off of Capitol and 680. There were some 25 bidders in attendance with down payment cashier's checks in hand. Three properties were to be auctioned - all three were open for public viewing over the last few weeks. A small starter house in the 7 Trees area started at $50,000 (an obvious teaser price if I ever saw one) and sold for $207,000. The second home which was in a similar area with additional square feet sold for $280,000. The bidding depth was light. There were only a few serious bidders - or perhaps after the $50,000 price was blown up, the other bidders quickly became quiet. The interesting thing about this auction was that the winning bid was not contractually binding - it still had to be presented to the bank (REO department) for their approval of the price. The bank could easily reject the offer as too low and the deposit money would be immediately returned. This is the background of why many REO listings on the MLS had previously been offered at auction. Yes, there is always a winning bidder, and no, that does not guarantee that the home will sell. More definitive of a market is when there is no "strike-price" and the auctions are "absolute". Then the true market value is more easily achieved. Worth the effort - yes - we suggest the drive through at In and Out Burger prior to the auction to keep you content through the process.

Twitter, Google, Facebook, Real Time Search Engines

I love this valley: http://www.siliconvalley.com/google/ci_11776452?nclick_check=1
And as mind-blowing as this is to read, that there could be yet another usurpation possible with yet another industry giant, it just goes to remind me that this always happens and always will. What is super cool is that we are in the midst of it all. Would you rather be in the heart of the steel industry, the center of the fishing industry, the core of the oil industry, or perhaps in the center of every connected facet of life...?

Buy as an investor sell to owner occupant

There are a lot of homes right now that are perfect mid term flips. Rents are strong, prices are down, especially on the short sale and bank REOs, the right combination for break even cash flow on houses and duplexes. Then in a couple years, take the right exit strategy and sell when the first time buyers are out in droves and move up home buyers are also fueling the market. The strategy is not so much to buy on numbers today, it is to focus on the type of home to buy based on what is easy to sell in the future to that buyer profile. Need help?

Silicon Valley, Facebook and Real Estate

I'm not going to go into too deep of an analysis here.... I caught a clip of "Who Wants to be a Millionaire" today. One of the questions was: Which internet giant has a CEO who is 24 years old? A. My Space B. Facebook C. ______ and D. _____ (the last two I can't remember) Answer is B - Facebook - final answer.
Facebook is yet one more internet giant created in our backyard - well actually at Stanford - same difference! The vibrancy of this area continues and will continue for a very long time. Has this affected real estate values - definitely. In fact Palo Alto is UP this year something in the range of 5%.
Google waited forever to go public - a wait lengthened by the Dot Com bust. Facebook probably will do the same - for the better. And as more and more of my 40 year old friends finally fall to the lure of sharing their college and high school pictures with friends they haven't seen in decades, the more valuable will be the FB shares - and the homes in Palo Alto.... OK I know... it's late and I rambled again. Signing off.

(By the way, scroll down to my Facebook button and friend me)

Santa Clara County Home (REO) Stats

5,800 listings for sale on the MLS in Santa Clara County.
*** 48% of those are Bank Owned REO or short sales ***
2,200 homes are in "Pending" status
*** 78% of the Pending homes are Bank Owned REOs or short sales ***

The bank deals ARE the market. This is very clear. Some "normal" sellers will price according to what the banks are selling homes for or they will not attract buyers. Yes, this is not easy to accept, yet that is reality.

Case Study of Duplexes in San Jose

I'm representing a buyer on a very well-priced duplex purchase in San Jose. This little street of 7 properties which were built in the late 1950's rode the roller coaster of boom and bust. Three side-by-side duplexes all sold in mid-2006 between $770,000 - $795,000. Now two of those three units will sell between $500,000 - $530,000. One was a short sale which was in escrow for 4 months, the other a bank REO that should transact quickly. Of the 4 other owners on that street that did not play the real estate game in the last few years, they apparently have been sitting pretty, collecting rents and paying low Prop 13 property taxes. Go conservatives!

Top Ten Foreclosure Cities

1. Merced, CA

2. Modesto, CA

3. Stockton, CA

4. Riverside, CA

5. Detroit, MI

6. Fort Lauderdale, FL

7. Cape Coral, FL

8. Vallejo, CA

9. Las Vegas, NV

10. Sacramento, CA



Interesting that Merced is the top foreclosure city in the US. Why Merced? Perhaps because it was a hotbed for home investors over the last few years ever since the new University of California campus was chosen there. I saw a lot of people buy there with the expectation that some 30,000 students and faculty would greatly impact the value of real estate in that city. Just buying anything in any market does not guarantee you success. We may all agree that now is a good time to buy. What is more difficult is what location, property type, etc. is best to buy. Following the herd is also not wise. The herd was very present in Las Vegas too as seen by their 9th place ranking. The land of glitter had many non-owner purchases. These being the easiest to let go to foreclosure when times get tough. The strongest markets? - those that have very high owner occupant ratios. Look at the central bay area with ratios as high as 98% for owner occupied single family homes - now that is stability.

Bank REO Purchase Addendum - Watch Out!!!

After a buyer makes an offer on a bank owned property, the counter offer addendum that comes from the bank or from the asset manager/servicer is interesting, for lack of a more nasty word! Little clauses such as: attorney fees for the bank to be paid by buyer if buyer loses their dispute, buyer's attorney fees to be borne by buyer if buyer wins! Evil, evil, evil. If buyer defaults on the purchase agreement, then the bank keeps the deposit without needing buyer to approve release of deposit from escrow (I hear retired Realtors turning over in their graves at that one - also to be known that Realtors never retire, they just sell underground dwelling into eternity). OK, yes, you can hear in my words that I am a bit upset at these addendum and the rough-shod take-it-or-leave-it attitude of the banks disposing of their inventory. My current buyer loses his job during escrow and the bank (to remain un-named - let's just say they are now owned by Chase...) decides to keep the family's $5,250 deposit. Nice, very nice...

Mervyn's Bankruptcy Leases Purchased by Kohl's & Forever 21

Good locations trump bad economic times.

I'm leading with the moral of the story. I know that is bass ackward. Although this market is somewhat that way too. So, it makes sense!

Have you seen a Forever 21 store? I have, they do not look like a company that would set up shop in a 80,000 square foot space recently occupied by Mervyn's. Maybe they will take a front corner section and install ice skating or a BMX park in the other 70,000 square feet. Now to be news worthy, F21 expects to widen their product line offerings and step up to a big box presence. I am NOT going to that new store with my daughter anytime soon.

Kohl's I understand. They were head to head competitors with Mervyn's. Although, may I ask, where was Target in this bidding?

The bankruptcy auction of these spaces yielded interesting results. F21 bid on some 70 Mervyn's locations. They walked away with 15. Other bidders were real estate investors. They undoubtedly won some spaces. Which probably will then be offered to the Kohl's and Forever 21 companies.

The auctions were oversubscribed because there was good value in the under- market leases that Mervyn's controlled. As in a previous posting, some of these spaces were at $.20 per foot! Bankruptcies gives us a good vantage point on real estate. Kmart went through the same process years ago. Some sites were swooped up (as in Kohl's first entry into the Bay Area) and other sites sit vacant in the middle of long stretches of highway from here to nowhere. Yes, that is why I like in-fill locations in strong metros. (Hmmm....is that the moral of the story?)

Mervyn's Bankruptcy Leases for Sale

One of Mervyn's greatest assets is the leaseholds it has in prime retail locations in Arizona, California, Nevada, Utah, New Mexico and Texas. These leases have value because most of them are significantly under market and some are held for decades into the future. The fast approaching bid deadline is currently scheduled for December 5, 2008. For sale are 154 leases in the 6 states. A couple Bay Area leases are highlighted below:

375 N. Capitol, San Jose, 70,000 sqft, through 2020, rent $9.85 per year

749 E. Calaveras Blvd, Milpitas, 75,000 sqft, through 2041, rent $18.51 per year

1500 Del Monte Center, Monterey, 81,000 sqft, through 2040, rent $1.22 per year

950 W. Hamilton Ave, Campbell, 75,000 sqft, through 2019, rent $2.21 per year

350 Showers Drive, Mountain View, 64,000 sqft, through 2010, rent $2.55 per year

2675 Geary Blvd, San Francisco, 90,000 sqft, through 2047, rent $24.95 per year

880 Mowry Ave, Newark, 82,000 sqft, through 2049, rent $12.23 per year

Yes those rents are very low - take the Monterey building for example, they are paying approximately TEN CENTS per foot per month and they have control of the building for another 32 years!

If you want to make an offer on any of these. Give me a call ASAP.