Wednesday, April 8, 2015

Sellers’ Benefit to an Off-market Sale

Off-market sales have been more prevalent over the past number of years, more than ever before. This is due to the lack of supply and incessant demand in San Francisco.  Specifically, Realtors representing Buyers continually need to think outside the box in finding their Buyer clients something that fits their desires and satiates their needs; hence off-market deals ensue.  In an effort to do so, agents often network their sphere of influence, and fellow agents, to see if there are any owners deliberating the sale of their home.  Buyer agents regularly canvas neighborhoods and knock on doors to spur owner interest in selling (quite possibly off-market for the ‘right’ price).  For the right price, many people are willing to bring their property to the market.  

The real benefit to a property owner to sell his / her home off-market is 1) privacy, 2) convenience, and 3) reduced costs. 

To many, privacy is paramount.  They handle all their personal, business and financial affairs behind closed doors.  In doing so, off-market sales are ideal.  Neighbors down the street and various “lookie-loos” a block over will not parade through one’s home with no real intent to buy.  We all know someone who fits that description. A Seller’s Realtor should have a strong rolodex of potential Buyers and top producing colleagues who know the best Buyer for the home – and willing to pay the highest price possible.  When confidentiality is of high importance, the off-market strategy is a top strategy to consider to yield the greatest return. 

Convenience is pivotal for the busy professionals and the affluent.  Knowing they don’t have to keep the home in pristine condition, and can originate contractual terms that can benefit both sides of the table without being pressed for time bodes well in these instances.  The Seller may need more time to find a replacement property, or the Buyer would like to conduct various inspections – such cases make off-market sales beneficial as should one side terminate the deal, no stigma will come of it.

Reduced costs explains why off-market sales now account for up to 20% of the property sales in San Francisco.  Sellers can save on a multitude of home preparation expenses, including: property inspections, painting, cleaning, landscaping, and staging / design to name only a few.  When selling off-market, such expenses can be ‘passed’ onto the Buyer in the form of a concession or reduced price.

In the end, off-market sales are all about relationships, and what kind of ‘market reach’ your Realtor has to procure the ideal Buyer for your property off-market.  The goal for a Seller will always be to 1) get the highest possible price and 2) close escrow in a timely fashion, and the off-market venue is another way to capture the market, but do so in a more strategic, efficient, and conscientious manner.

Monday, February 9, 2015

Why Buy Real Estate in San Francisco




This is an excellent graph illustrating the historical performance of San Francisco Bay Area real estate since 1984.  Here's my takeaway:


1. Even though the long term trend may appear rather smooth, price patterns can factually be rather lumpy in the short term. This creates opportunities for purchasing and selling given shorter to medium term goals; not to mention that it can save or make you a lot of money.

2. The rate of increases in property value becomes very large as they are measured off of the short term price drops--thus reinforcing the first point that appreciation potential becomes most pivotal when taking advantage of dips.

3. It's not just a matter of magnitude, but that of duration. During the Savings and Loans crisis of the early 90's: SF property, by and large, lost a total value of 11%. However, when considering the duration--that only amounted to 2.9% per year--which is not a rate steep enough to warrant panic. This is an example of low magnitude with a longer duration. Then we look at 2001: in this example we have the opposite effect--a larger magnitude but a shorter duration. Even though the annualized price depreciation was steeper--the time period was short enough that a very busy person would most likely have never noticed it!

4. Finally, this data doesn't even consider the greater context of it all! Transplanting this information relative to: demographic trends, local GDP growth, newer and established industry growth (i.e. Tech), and everything else that causes demand to grow in the Bay Area then the story makes so much more sense why the performance speaks for itself.

Friday, January 23, 2015

Chinese Capital in the Bay Area

Cory Weinberg of the San Francisco Business Times wrote an interesting article re Chinese capital and its growing presence here in the Bay Area.  

The $296 million sale of the First and Mission Streets mega-development to Beijing-based Oceanwide Holdings is one of the boldest moves by a Chinese developer in the Bay Area. The region has also seen notable Chinese investment in luxurious San Francisco condos, massive Oakland mixed-use plots, and San Jose office towers in the last couple years.

Chinese investors aren't just interested in the region or the country because of our hot real estate market. They have spent more than $600 million on Bay Area real estate during the last two years, according to Real Capital Analytics, for reasons that are more complicated. 

Here are six reasons why Chinese real estate companies want a piece of the action:

1) The Chinese real estate market is overheated
A report by Knight Frank says that Chinese investors have set their sights toward the western world mostly because their own residential market has cooled significantly. As a result, the value of Chinese investments in U.S. real estate grew from $600 million in 2009 to $12 billion in 2013.
That's in part because the Chinese government has put cooling measures in place to weaken demand, while the amount of residential space that sits vacant has shot up 80 percent since 2010. Developers are now in "cutthroat competition" in China, forcing them to get creative for where they park their capital.

2) Chinese companies have more freedom lately
Chinese companies looking to invest in overseas real estate were handcuffed until recently. But starting in 2013, Chinese companies could invest $1 billion abroad instead of just $100 million. Insurance companies could double the amount of their assets they put in real estate, according to Knight Frank.

"Prior to 2011 there was virtually no outbound direct investment from China into commercial real estate. A few years ago, the Chinese government started to relax numerous restrictions and actively encourage outbound investment via its 'go out' policy, so it really was a sea change," said Robert Hielscher, managing director of JLL's capital markets group.

3) U.S. and China got friendly and expanded visa limits last year
Don't forget about President Barack Obama's announcement last fall to extend visas for Chinese business people, students, and tourists in order to spark investment. That's helped open more doors for Chinese companies to open offices and for Chinese nationals to buy their own homes here.

"It's made a tremendous difference in the flow of people being able to get in and out of the country," said Skip Whitney, executive vice president at Kidder Mathews, who advises investors in China, Hong Kong and Southeast Asia on West Coast properties.

4) There's been more matchmaking
Bay Area real estate developers have also received more help from city officials with finding Chinese capital partners. Former Oakland Mayor Jean Quan helped link East Bay-based Signature Development Group with Zarsion Holdings in 2013 to help pay for the massive Brooklyn Basin development.

China SF, a nonprofit that works with San Francisco's Office of Economic and Workforce Development, also helped bring together the off-market sale of First and Mission to Oceanwide.
"We've been looking at real estate for last year and a half," said Darlene Chiu Bryant, executive director of China SF. "We created a book of properties interested in inbound investment" to show Chinese companies.

5) Buying big U.S. commercial properties makes headlines
There's no better way for a Chinese company to get name recognition overseas than investing in a trophy property. That's why more Bay Area business and political leaders know Vanke - not because of its $81.3 billion in total assets, but because it became the joint venture partner for Lumina. Even though Oceanwide has more than $5 billion in revenue, not many in the United States had heard of the developer until they paid $200 million for a downtown Los Angeles property in 2013.

"It's also a way for these Chinese companies to become more visible international. If you're the first (company) to buy a building in New York or London or San Francisco, that's unbelievable PR in addition to the value of the specific deal," Hielscher said.

6) San Francisco has started to look more like Shanghai, kind of…
China has more than 70 towers taller than San Francisco's tallest building, the Transamerica Tower. Yes, San Francisco hasn't cared for height very much, but that's starting to change as the Transbay district pops up. One of the buildings Oceanwide will build will be the second-tallest in the city at 910 feet.

"It's fortuitous and not totally coincidental that this type of interest is coming as San Francisco seems finally to have understood that verticality makes for a better city and it's finally setting itself up to be a denser city with a 24-hour lifestyle," said Greg Flynn, CEO of Flynn Properties, which has retained a minority stake in 225 Bush St. after selling it to Chinese developer Kylli Inc. last year.

Wednesday, November 5, 2014

San Franciscans Crash Capri


When you go from the Mediterranean climate of San Francisco to the Mediterranean itself, you step into a deep history.  Capri, one of the destinations on the honeymoon trip I took with my wife, is no different: in fact, it's been a resort town since the times of the Roman Republic.  You can still visit the ruins of the Villa Jovis, the retirement palace built by Emperor Tiberius.  And singers, artists, and writers have been finding their muse on the island for a long time.



Like San Francisco, parts of Capri feel like they're not entirely there for the residents: you might see as many tourists at the Grotto Azzurra as you would crowding around the cable car stop on Powell Street.  But this isn't necessarily a bad thing.  An infusion of international visitors can shape the surface character of a city without chipping away at its authentic core.

Similar to San Francisco's painted ladies, you can see Capri's heritage shining through in its architecture.  One thing I was interested to see were the brick retaining walls on the hillsides – something you won't see on any of San Francisco's hills.  San Francisco may be a little earthquake-shy about that kind of detail, but in Capri, these walls are laid in by hand, and they have the residents' trust.

But there is one thing about Capri: it's expensive.  When you're on an island, with nowhere to expand to, real estate tends to be at a premium.  That's why, for example, Tokyo is one of the most expensive places in the world to live.

San Francisco has an inkling of this, being bounded on three sides by water.  But in San Francisco's case, its connection to surrounding communities takes some of the pressure off.  While some people may want the full city experience, others are content to live in Daly City, across the bay in Berkeley or Oakland, or even further out.  Commuting into Capri isn't that easy.

And San Francisco has also embraced, in some neighborhoods, the demand for housing and grown up – up, as in skyscrapers.  Take the Millennium Tower in SoMa: 58 stories, mostly condominiums.  Capri hasn't embraced that sort of high-rise, high-density housing, for understandable reasons: it takes an aesthetic leap of faith to break from tradition in an area like this.

San Francisco is a city that has to walk a balance between preserving its history and character and growing into the future; between existing within its bounds and making itself inviting for homeowners who fall in love here.  And that's part of why I love it.  For Capri, being a resort island may be preferable, and that's fine: I'll be happy to visit it again, revisiting some lovely honeymoon memories, and still set my roots in the City by the Bay.
 


Monday, October 20, 2014

Do I Rent or Do I Sell?

A fascinating case study just came up: I was recently speaking with someone who was asking me – should I continue to rent my former home, or sell it outright?

Now there are many facets towards this decision beyond making “financial sense,” like convenience, time and specific goals – but I’ll show how to at least make sense of the numbers. Numbers don’t explain everything, but they sure help when a justification is trying to appeal to reason.

Here was the scenario:

They paid $925,000 for their residential property, put 20% down to avoid PMI, got a great rate at 3.85%, and just completed their 14th year of a 30 year mortgage. We had a conversation as to what their estimate of property value and we agreed that for the time being we would leave that number at cost, the $925,000. The scenario looks like this:


The nitty-gritty surrounding the rental numbers look like this:  

So the immediate thought is: What!? How does this make any sense? I’m losing $4,000 per year; it’s costing me money to rent this home out?

But like most things in life, it’s never quite so simple. Based on the mortgage contract—year 15 looks like this:

It boils down to the fact that people don’t think through just how much equity is created on the back end of the mortgage! Even though there is a negative annual cash flow, the actual equity had increased by nearly $23,000 (The $267k less the $245k equity from last year). The net appreciation when one considers this equity growth less the annual cost to rent is a net appreciation of ~$18,940. 

Obviously nobody is making life altering changes over $18,940, but we left out the most important point of all: what if the value of the home appreciates? Selling the property meant that the upside potential is eliminated; it was determined in this case that the cost of waiting wasn’t so bad: and that they could afford the modest annual expense. As far as tax-planning goes, they were looking at the best case scenario: negative income (write off) + appreciating assets. People that are buying bonds today, for example, are getting the exact opposite: income + losing value. That conversation is for another day.

Anyhow, I have taken the liberty of creating a model for this. If you are interested, please give me a call.