Zillow - give me a pillow

Zillow.com still is not accurate with house prices based on my scientific and highly biased survey by myself of my house. About an 18% below market valuation of a simple track house in Menlo Park, CA. What would I have said if the valuation was 18% higher than what I thought the value was? Maybe not blogged this issue. Like I said, it was a very biased survey. I hope nobody makes buying decisions based on Zillow. I sure won't list my house based on Zillow!

Automotive Commercial Real Estate

In the Bay Area, I know that available lease space is hard to come by if you have an automotive use (read dirty - as in auto repair, smog, tires, muffler, etc) The difficulty in finding lease space, due to neighborhood issues, zoning, averse landlords, etc. makes lease rates higher and keeps occupancy very high. This seems like a good niche to invest in. I agree. Expect to pay more though in lender margins and the cost of a Phase 2 environmental report on each sale or refinance. My mantra is - people make money doing what other people won't. Mechanics do and landlords that rent to mechanics do.

Sometimes the Experts are Not

In the Mercury News Real Estate section this last weekend, a mailed in question was answered about selling a triplex that the owner lived in one unit. He wanted to sell his place and 1031 into a condo to live in. The "expert" completely disallowed any 1031 possibility because he lived in the property. This is not true depending on how he filed his taxes. He very well may have listed his 1/3 portion as his principal residence and the other 2/3 as investment property. Thereby allowing him to exchange his investment portion via the 1031 exchange. Could he exchange into a condo? Yes, though he cannot live there until he converts it to investment property, ideally at least after one year of renting it out. Then, he also would be allowed his capital gains exclusion for the 1/3 portion. From this, he could buy a condo and live in it right away. Let's talk to a CPA please.

Larger Loans - Better Rates

If you need more money, you get better rates. That's not an addage that bankers go by, although, they sure seem to act that way. The lowest margin commercial (read conduit) financing starts at loans above $2,000,000. Margins over the 10 year approaching 120 basis points. The same loan under $1,000,000 and you may be paying margins of 190 or more basis points. Not fair in my book. Something must be said about a larger investment property providing more stability in a market. Especially in a less costly market, where a $3,000,000 shopping center IS significant. Not so in the Bay Area, where the donut shop I patronized today would sell for that amount. My eyes glaze over...

Shopping Center Financing Challenges

It is wise to have a lender take a good look at a retail property before making an offer on it. Even in premier city locations, let's say San Jose, there will be differences in the rates a lender will charge depending on the neighborhood. Is this "red-lining" - no such thing in commercial. Neighborhoods are ranked, A, B, C... and a lender will add costs to the margin depending on its lower grade. This can be shocking once you are in escrow and committed to close the deal. Of course, condition, age, tenant profile, lease terms, and more will also affect the rate a lender is willing to offer. I highly suggest having a lender who is willing to give you quick commitments when shopping for a center. Does anyone wonder why many deals fall apart, especially on high cap rate deals?

Starbucks NNN in San Jose

Rare I tell you, rare. Expensive too, this is not so rare.
Great Willow Glen-ish location at the corner of Leigh and Curtner. This location will do well always. Starbucks and Wireless Toyz, both with firm leases till mid 2011 only. Starbucks does not pay increased property taxes till 2011, if they decide to stay. Wireless pays 3% rent increases every year, then flat in both 5 year options after the first increase. This structure in confusing. Must use CCIM spreadsheet, Must use CCIM spread...
$670 per foot, 4.8% Cap Rate, 8 years old, $2,198,000 price.
When you buy a strip center, you buy the leases. If these leases were structured better, this center would fly off the shelves. Then again, it's Starbucks in San Jose. I could be wrong.

Mexico - The Perfect Storm

Here's a great idea brought up at the Intero Mexico kickoff: Being that:
1. Mexico real estate is now available to be purchased by US citizens via the "fidecomiso"
2. Reverse mortgages are becoming very popular with people over 62
3. The baby boomers want to be active in their later years
4. And finally, passive rental income is always nice:

There will be a good trend of retirees who tap their equity via a reverse mortgage (no monthly payments) to pay for a vacation condo in Mexico (all cash) and then enjoy the benefits of a place to play AND rental income too.

Hellooooo......!!!!!

I'm calling my mother right now.

Bond Rates Peak + Caps Dropping

This is NOT what we want. Solid asset retail centers have been been getting more expensive since March as an adjustment to the low cost of financing which bottomed out at about 4.5% + whatever spread your local lender is charging. Deals were being financed at 5.75% for 10 year money. So caps went from 7.0 to 6.5 or lower. Now, rates are at a peak and financing is costing 6.1% or more. This wipes out most deals in expensive markets like California. It also makes deals in less expensive areas not as great. Cap rates have to rise to adjust for this. It is also a fact that sellers are less likely to react to this movement as quickly. It reminds me of gas stations and their quick and slow reaction to the cost of fuel.

Dallas Single Family Homes

A great leader I just met at the Mike Ferry Manager's Retreat in Irvine was teaching me about the single family market in Dallas. For $120,000 you can buy a 3 year old rental house. Rent would be $900 per month. After paying a interest only payment and all expenses with 10% down, you can cash flow $200 per month. Not a bad place to put $12,000. Find the right property management company and you can ride the Dallas resurgence. Apparantly that market is growing in very good ways. Hmmm... thanks for sharing Joel.

Las Vegas - what do you think?

Two real estate friends of mine (yes, there is a differnce between real estate friends and "regular" friends) just got back from Vegas where they put deposits down on 3 condo hotel units. One development in downtown and the other on The Strip. The sales pitch attempted to counter the negative media news of slumping sales in that market. Suggestions were varied as to why the market is doing better than what is being reported. Examples: 1. A large number of "sales" are pre-construction contracts, which will not close (and hence, record) for a year or more. 2. Volume may well be down, yet average sales prices are holding firm. (I believe in supply, demand & price curves - sorry I don't believe this unnatural phenomena) Builders need to hold recorded sales prices high so that the rest of the development will continue to sell at similar prices. That is why many units are sold at higher prices because the developer is kicking in extra bling (upgrades, upgrades, upgrades). Finally, they countered the concern of the glut of hotel rooms. They're reply was "if we build it, they will come>" Sure, to an extent. I have a hard enought deciding which hotel to stay at now. I only imagine the hell when there are 5 Bellagios side by side.

Condo market in San Jose soft

Unless it has something very special. The condo inventory is increasing and sales are weakening. There will always be sales, yet the winning seller is the one who cuts to the chase faster. A friend's condo was listed at $469,000 in Evergreen area. The competing condo that had been on the market for $499,000 with a better location in the complex, reduced their price to $479,000. They're going in the right direction, yet it makes a buyer decide whether to spend $10k or not on a better location. 50/50 shot perhaps that the location best unit wins. Bad results if they don't. Then the next comp is $469k or lower. When you have an advantage, price is the same as the unit without. That's an easy choice for a buyer and a 100% chance you will get the offer.

Gas Prices and Investment Real Estate

I've always believed that transportation influences real estate. The house in Tracy may be far cheaper or more beautiful than the house in Sunnyvale near your job. Yet, the 3 hours in the car commuting will tip the scale to the Sunnyvale location. This makes Sunnyvale more expensive. Will much higher gas prices further this imbalance? Core location real estate is always more expensive. It is also the asset that holds the best value especially in rougher times.

Bay Area Trends by WaMu

Kari Noomen, goddess of multi-family lending in the Bay Area, held her bi-annual investors forum this evening. The talk in San Mateo was about rent growth, cap rate growth (slightly) and strength in the diversity of the market. Still odd phenomena with an inverted yield curve, although most people are not talking about that being a precursor to the R word anymore. This is a wonderfully strong, and therefore expensive, market. Great place to own and slowly, over-time build equity. Definitely put the next forum on your social-business calendar for sometime in December.

Trash in San Jose

Garbage collection costs are expected to rise 20% or more for household collections. San Jose's multi-family building owners will only feel a 4% increase. Why the difference? Thank a young Chuck Reed, attorney representing the apartment association some 20 years ago. He led the push to separate the billing and servicing of the two trash collection services. Now, decades later, it is one win the landlords can relish. It is some compensation for a group that tends to lose most of the expense battles.

Do you bet on real estate or businesses?

I suggest you buy real estate and bet on the business. Will Blockbuster video survive, thrive or dive? It's less important some of the intrinsics such as price per square foot, traffic counts, ingress/egress, than will the business model be here next year. I'm villified for this and I still stand behind my position - Starbucks is a fad. Should you really pay a 5% cap rate for that tenant? Will people tire of coffee or will another vendor do it better in the future? I suggest yes, perhaps on both counts. Then what, Mr. Landlord? Re-tenant a 1,200 square foot coffee shop with a DRIVE-THRU? Point of clarification - I love my grande lattes.

Condo Towers in San Jose or a House

Someone has to have the vision of a changed landscape, vibrant lifestyle, robust businesses for the skyline to change. People like Donald Trump, who may be despised by many, change the face of cities all the time. San Jose is being redeveloped and will be drastically different in the decade to come. Condos will be more the norm for first time buyers and the 1,400 square foot ranch house on a 6,000 square foot lot will be more up-scale. What will increase in value more? It's a timing issue. The first condos that hit the market must be sold at attractive prices to get the projects underway. Then values will go up as the market matures and as people get more accustomed to the condos. Then the market will flatten as more inventory hits. This rapid rise in prices and flattening will differ from the stable rise of the single family home prices.

Auburn, Grass Valley & Nevada City

Very nice communities that have benefited hugely from Bay Area retirement dollars. The baby boomers have purchased many houses in the area at prices less than what they sold their Bay Area homes. The communities have boomed in value and population, yet the retail is a significant missing factor. Diversity of restaurants and shopping tend to be sorely missed. New retail in these areas will do very well. Also upgrading shopping centers with nationally recognized tenants is a good move. I would rather invest there than the more open Central Valley.

Flexible 1031 Exchange Intermediaries

Can you get away with a closing on an exchange past 180 days? NO. That is not a debate. Can you fudge the 45 day rule? Some do and some get away with it. Don't expect your national exchange company to do it. By the way, this is illegal. And just fixing that document does not put you in the clear. Do purchase contracts have dates on them? Do lender docs have dates? This is a very risky strategy that I cannot stand behind. It's best to be very clear on what is available to replace your property with before your 45 days is anywhere near up.

What to buy?

Buy the perfect house, it will make your life much easier in the future. There will be many temptations to buy a less than perfect house for the savings of some money. Take my word for it, remodels take more time and money that you initially plan for. You cannot move a busy street or noisy overpass. You will have to heavily incentivise a future buyer to buy your castle. Also, is time not money? Do you enjoy or just tolerate weekends at Home Depot? Do you like the beach, the mountains, Disneyland or Yosemite? Does you boss like you rested on Monday's and most importantly, what does your significant other really think?

Google, Yahoo & Apple

These three and other large, well-capitalized tech companies are buying large tracts of land in Silicon Valley for future expansion. This is a great sign for the long term health of the Valley. With large investments, these companies will be more apt to stay than ship off their workforce to cheaper locales such as Austin. That was a boondoggle that Apple went through in the mid 1990s. Many dissappointed Apple families moved back to the Bay Area only to find a costlier transition. Silicon Valley is here to stay. That's why most tech giants are betting long.