A Need to Adjust to Cooling Market

Advice for buyers and sellers to succeed in the market’s balancing act

Across the U.S., home buyers are demonstrating less urgency than they have in recent years, according to an October market report from Redfin. While demand remains strong, the report found, over one-third of homes for sale nationwide had a price cut of more than 1%, with discounts on the rise compared to last year.  

The gap between homes’ listing prices and sales prices is widening in a number of markets. The California Association of Realtors, for instance, found that the state’s sales-to-list-price ratio hit its lowest point in 20 months in October.

A large disparity between listing and sales prices can indicate that sellers are increasingly out of step with a changing market, and it may be time for a reality check—as well as discounts on listing prices.

In a sales situation, buyers and sellers alike must keep as up to date as possible on market data and set realistic expectations. Sellers often err on the side of using obsolete comps to price their homes, which leads eventually to discounts in a cooling market. Buyers, on the other hand, must keep in mind that discounts don’t mean huge bargains, but rather increased negotiability.

"We often see houses listed with the expectation of sellers that pricing has been continuing upward, and a lot of times, they price their homes by extrapolating continued upward market movement," said Paul Habibi, professor at the UCLA Ziman Center for Real Estate. "But once the market stalls out, those houses sit on the market for longer, there’s a scarcity of buyers, and lower bids. Sellers start to lower their asking prices or else accept offers below list."

However, real estate analysts say, a decrease in sales-to-list-price ratios does not forebode a significant downturn.

"If you look at the broader economy, the fundamentals are still strong," said Daryl Fairweather, chief economist with Redfin. "The GDP is growing, and unemployment is low. Sales prices are still growing. In order for it to be a real reason to worry, prices would have to start going negative."

Still, it pays for both buyers and sellers to be armed with the most current information about the state of this slight cooldown in the U.S., and to know how to interpret and act on disparities between asking and sales prices.

Where We Are Seeing Disparities Now

The hot Seattle real estate market seems to have reached a turning point, with the average home selling for 0.6% below listing price in October, the first time prices were below asking since 2014.

"Prices have gone up so much recently in Seattle that buyers have reached a point where they’re saying they’re not going to accept these," Ms. Fairweather said. "And with mortgage interest rates going up, more people are thinking of renting instead of buying."

Seattle is not the only market experiencing a slowdown in sales and sales prices. In Los Angeles, too, 23.8% of sellers sold their homes for below the listing price this September, while the median home price in Los Angeles County saw a 3.6% gain, the smallest in three years.

"We’ve had double-digit annual price increases in several of the years after the recession," Mr. Habibi said. "Now we’re seeing the market start to slow down because the pace of annual increases is generally unsustainable at that rate."

Third quarter market reports also reflected a cooling of home sales in Manhattan. The borough is experiencing its most significant slowdown in a decade, with sales declining by 11% compared to quarter three of last year, according to Stribling & Associates. As in Seattle and Los Angeles, this is leading to an increase in disparities between asking and sales prices.

"On the whole, there is more negotiability, and an increase in inventory," said Elizabeth Ann Stribling-Kivlan, president of Stribling & Associates. "We had a real run, but we’re definitely seeing a slowdown. But I don’t think that’s a bad thing."

What These Disparities Mean

Nationwide, home sales are decreasing, and property is lingering on the market for longer. But other real estate experts agree with Ms. Stribling-Kivlan that this does not presage a major economic downturn.

Instead, they say, the trend represents a normalizing of the market after moving for several years at a frenetic pace.

"There are consistent clues that we’re seeing a shift in the velocity of the market, and moving away from an extreme sellers market," said Javier Vivas, director of economic research for Realtor.com. "There’s some uncertainty that happens when you’re coming down from great heights. But those higher-priced, historically hot markets are really now getting more of that correction and moderation."

Another challenge for luxury real estate in some areas is oversupply. In Manhattan, a construction boom of high-end condos has led developers to begin dropping their asking prices. The average price of a Manhattan apartment decreased  4% to $1.93 million in the third quarter of this year plus, there’s a seven-month supply of apartments, up from a five-month supply last year.

But again, this data should not be interpreted as a sign of impending crisis. And the diversity of the market in New York means that what is true for one sector may not be the case for another.

"New York is fragmented, with co-ops, condos, resales, and new development, as well as borough by borough," Ms. Stribling-Kivlan pointed out. "It’s been interesting to watch the very high end, which has had increased activity to some degree. For the very wealthy, there has been an incredible amount of wealth created in terms of the stock side of this economy. They may be buying for less money, but they’re seeing a good deal and taking advantage."

How Buyers Should Respond

One advantage buyers seem to have over sellers is their access to more current information about markets.

"Sellers may be pricing based on comps that are months old. In a changing market, what your neighbor’s home sold for a few months ago may not be what you can sell for now," Ms. Fairweather said. "Meanwhile, buyers are looking at what’s currently on the market and really trying to get the best value."

However, buyers may be vulnerable to a misunderstanding of what a slight slowing of the pace of the market means for them. They should not, experts caution, expect to land substantial bargains.

"There’s a misconception that prices will decline at some point," Mr. Vivas said. "It can happen in extreme cases, but usually prices don’t decline in a growing economy. It’s about a deceleration in the pace of growth."

And at the high end, he added, some investors may be sitting tight to see how they will be impacted by the changes to the U.S. tax code enacted at the beginning of 2018, which has placed tighter restrictions on the deductions wealthy homeowners can take for property taxes and mortgage interest.

"The big wild card is the tax impact, especially at the end," Mr. Vivas said. "In tracking this entire year, the consensus is the impact [of the new tax code] is being buffered by the fact that people haven’t received their tax filings yet. We might see that come April and May, people think twice about where they put their money."

How Sellers Should Respond

Just as closely analyzing the most current data on home sales is crucial for buyers, sellers, too, must seek out the most up-to-date information  to price their homes correctly.

The current increase in disparities between asking and sales prices indicates that many sellers, though, are setting their home’s value according to an earlier, faster market.

"Sellers notoriously overshoot fair values because of personal attachment to their place of residence," Mr. Habibi said.

However, he cautioned, sellers cannot necessarily rely on agents to provide the best dollar value for their home, either: "Agents do the opposite. They under-list to sell quickly and move on to the next listing. One needs to look at the actual data and be as objective as possible."

Studying the most current market data is critical to listing your home as closely as possible to what buyers will now realistically be willing to pay. Sellers should look at homes that have gone into contract in their area recently, taking into consideration asking and sales prices, and the amount of time those properties sat on the market.

It’s also important to hire a seasoned broker who has experience selling in cooling markets.

"They can take an analysis of the raw data and use it to justify what a good price guide would be," Ms. Stribling-Kivlan said. "They’ll also have an anecdotal idea of what people out there are looking for."

Be prepared, too, for your home to attract fewer would-be buyers and to linger on the market for longer than it would have in the faster-paced market of previous years.

"Buyers are now going to have more options, and there’s not as much urgency, and not as many multiple offers," Mr. Vivas said. "Be prepared for single-offer scenarios. Some properties will stay on the market longer, but they will sell. But the premium you were getting in 2016 is probably not going to be there in 2018 or 2019."

All this may persuade those thinking of selling to put their plans on pause and wait to see if the market speeds up again. But you should figure more than just raw data into your calculus of whether now is the right time to sell.

"Residential real estate is an emotional commodity. People see prices coming down and get a little hesitant," Ms. Stribling-Kivlan said. "But great fortunes are made in a changing market. Just because prices are down doesn’t mean you have to wait it out. Figure out what your personal and financial needs are."

Originally Published in The Wall Street Journal, November 23, 2018

A Balancing Act

Disparities Between Listing and Sales Prices Signal a Need to Adjust to Cooling Market

How both buyers and sellers should act in the face of a real estate slowdown

Across the U.S., home buyers are demonstrating less urgency than they have in recent years, according to an October market report from Redfin. While demand remains strong, the report found, over one-third of homes for sale nationwide had a price cut of more than 1%, with discounts on the rise compared to last year.  

The gap between homes’ listing prices and sales prices is widening in a number of markets. The California Association of Realtors, for instance, found that the state’s sales-to-list-price ratio hit its lowest point in 20 months in October.

A large disparity between listing and sales prices can indicate that sellers are increasingly out of step with a changing market, and it may be time for a reality check—as well as discounts on listing prices.

In a sales situation, buyers and sellers alike must keep as up to date as possible on market data and set realistic expectations. Sellers often err on the side of using obsolete comps to price their homes, which leads eventually to discounts in a cooling market. Buyers, on the other hand, must keep in mind that discounts don’t mean huge bargains, but rather increased negotiability.

"We often see houses listed with the expectation of sellers that pricing has been continuing upward, and a lot of times, they price their homes by extrapolating continued upward market movement," said Paul Habibi, professor at the UCLA Ziman Center for Real Estate. "But once the market stalls out, those houses sit on the market for longer, there’s a scarcity of buyers, and lower bids. Sellers start to lower their asking prices or else accept offers below list."

However, real estate analysts say, a decrease in sales-to-list-price ratios does not forebode a significant downturn.

"If you look at the broader economy, the fundamentals are still strong," said Daryl Fairweather, chief economist with Redfin. "The GDP is growing, and unemployment is low. Sales prices are still growing. In order for it to be a real reason to worry, prices would have to start going negative."

Still, it pays for both buyers and sellers to be armed with the most current information about the state of this slight cooldown in the U.S., and to know how to interpret and act on disparities between asking and sales prices.

Where We Are Seeing Disparities Now

The hot Seattle real estate market seems to have reached a turning point, with the average home selling for 0.6% below listing price in October, the first time prices were below asking since 2014.

"Prices have gone up so much recently in Seattle that buyers have reached a point where they’re saying they’re not going to accept these," Ms. Fairweather said. "And with mortgage interest rates going up, more people are thinking of renting instead of buying."

Seattle is not the only market experiencing a slowdown in sales and sales prices. In Los Angeles, too, 23.8% of sellers sold their homes for below the listing price this September, while the median home price in Los Angeles County saw a 3.6% gain, the smallest in three years.

"We’ve had double-digit annual price increases in several of the years after the recession," Mr. Habibi said. "Now we’re seeing the market start to slow down because the pace of annual increases is generally unsustainable at that rate."

Third quarter market reports also reflected a cooling of home sales in Manhattan. The borough is experiencing its most significant slowdown in a decade, with sales declining by 11% compared to quarter three of last year, according to Stribling & Associates. As in Seattle and Los Angeles, this is leading to an increase in disparities between asking and sales prices.

"On the whole, there is more negotiability, and an increase in inventory," said Elizabeth Ann Stribling-Kivlan, president of Stribling & Associates. "We had a real run, but we’re definitely seeing a slowdown. But I don’t think that’s a bad thing."

What These Disparities Mean

Nationwide, home sales are decreasing, and property is lingering on the market for longer. But other real estate experts agree with Ms. Stribling-Kivlan that this does not presage a major economic downturn.

Instead, they say, the trend represents a normalizing of the market after moving for several years at a frenetic pace.

"There are consistent clues that we’re seeing a shift in the velocity of the market, and moving away from an extreme sellers market," said Javier Vivas, director of economic research for Realtor.com. "There’s some uncertainty that happens when you’re coming down from great heights. But those higher-priced, historically hot markets are really now getting more of that correction and moderation."

Another challenge for luxury real estate in some areas is oversupply. In Manhattan, a construction boom of high-end condos has led developers to begin dropping their asking prices. The average price of a Manhattan apartment decreased  4% to $1.93 million in the third quarter of this year plus, there’s a seven-month supply of apartments, up from a five-month supply last year.

But again, this data should not be interpreted as a sign of impending crisis. And the diversity of the market in New York means that what is true for one sector may not be the case for another.

"New York is fragmented, with co-ops, condos, resales, and new development, as well as borough by borough," Ms. Stribling-Kivlan pointed out. "It’s been interesting to watch the very high end, which has had increased activity to some degree. For the very wealthy, there has been an incredible amount of wealth created in terms of the stock side of this economy. They may be buying for less money, but they’re seeing a good deal and taking advantage."

How Buyers Should Respond

One advantage buyers seem to have over sellers is their access to more current information about markets.

"Sellers may be pricing based on comps that are months old. In a changing market, what your neighbor’s home sold for a few months ago may not be what you can sell for now," Ms. Fairweather said. "Meanwhile, buyers are looking at what’s currently on the market and really trying to get the best value."

However, buyers may be vulnerable to a misunderstanding of what a slight slowing of the pace of the market means for them. They should not, experts caution, expect to land substantial bargains.

"There’s a misconception that prices will decline at some point," Mr. Vivas said. "It can happen in extreme cases, but usually prices don’t decline in a growing economy. It’s about a deceleration in the pace of growth."

And at the high end, he added, some investors may be sitting tight to see how they will be impacted by the changes to the U.S. tax code enacted at the beginning of 2018, which has placed tighter restrictions on the deductions wealthy homeowners can take for property taxes and mortgage interest.

"The big wild card is the tax impact, especially at the end," Mr. Vivas said. "In tracking this entire year, the consensus is the impact [of the new tax code] is being buffered by the fact that people haven’t received their tax filings yet. We might see that come April and May, people think twice about where they put their money."

How Sellers Should Respond

Just as closely analyzing the most current data on home sales is crucial for buyers, sellers, too, must seek out the most up-to-date information  to price their homes correctly.

The current increase in disparities between asking and sales prices indicates that many sellers, though, are setting their home’s value according to an earlier, faster market.

"Sellers notoriously overshoot fair values because of personal attachment to their place of residence," Mr. Habibi said.

However, he cautioned, sellers cannot necessarily rely on agents to provide the best dollar value for their home, either: "Agents do the opposite. They under-list to sell quickly and move on to the next listing. One needs to look at the actual data and be as objective as possible."

Studying the most current market data is critical to listing your home as closely as possible to what buyers will now realistically be willing to pay. Sellers should look at homes that have gone into contract in their area recently, taking into consideration asking and sales prices, and the amount of time those properties sat on the market.

It’s also important to hire a seasoned broker who has experience selling in cooling markets.

"They can take an analysis of the raw data and use it to justify what a good price guide would be," Ms. Stribling-Kivlan said. "They’ll also have an anecdotal idea of what people out there are looking for."

Be prepared, too, for your home to attract fewer would-be buyers and to linger on the market for longer than it would have in the faster-paced market of previous years.

"Buyers are now going to have more options, and there’s not as much urgency, and not as many multiple offers," Mr. Vivas said. "Be prepared for single-offer scenarios. Some properties will stay on the market longer, but they will sell. But the premium you were getting in 2016 is probably not going to be there in 2018 or 2019."

All this may persuade those thinking of selling to put their plans on pause and wait to see if the market speeds up again. But you should figure more than just raw data into your calculus of whether now is the right time to sell.

"Residential real estate is an emotional commodity. People see prices coming down and get a little hesitant," Ms. Stribling-Kivlan said. "But great fortunes are made in a changing market. Just because prices are down doesn’t mean you have to wait it out. Figure out what your personal and financial needs are."

Originally Published in The Wall Street Journal, November 23, 2018

Investing in Real Estate with Your IRA

Real estate can fund your retirement—but brace yourself for lots of risk and rules.

Self-directed individual retirement accounts allow people to diversify their investments into assets other than the traditional stocks, bonds and mutual funds that make up most retirement plans. Examples of alternative investments include real estate, precious metals and oil and gas holdings. The catch: The IRS requires a qualified trustee or custodian to administer the assets, such as handling transactions and managing paperwork and reports. So far, only about two dozen companies in the U.S. can act as custodians of self-directed IRAs. 

One of these is Advanta IRA, a self-directed retirement plan administrator in Largo, Fla., which oversees about $820 million in assets. “A lot of our clients are already real-estate investors, so their IRA is simply a new source of capital,” says Scott Maurer, director of business development for Advanta IRA. “And for others, they don’t like being at the whim of the stock market.”

At Advanta, investors open an account, fund it by transferring cash from an existing IRA, and then identify the property they wish to purchase—which typically is a single-family house that will be rented out. Advanta purchases the property on behalf of the investor’s IRA. Nearly all the transactions are cash deals, bypassing mortgage lenders. Rental income from the property is remitted to Advanta, which also pays the bills for the property. The cost for this service: about $200 to open the account and purchase the property and then a flat $295 a year to manage the account. (The company doesn’t handle property repairs or maintenance, tasks typically performed by a property-management company.)

The rules governing real-estate IRAs are anything but simple. IRA owners are forbidden from engaging in certain transactions regarding the property. Even something as simple as mowing the lawn of a property you own in an IRA can run afoul of IRS regulations—and render the account owner susceptible to losing the IRA’s tax-favored status, which could trigger taxes and penalties. That’s because IRS rules require contributions to an IRA to be made in cash, not in services, Mr. Maurer says. In fact, the U.S. Government Accountability Office issued a report on retirement security last month and stated that “people who invest their retirement accounts in unconventional assets—such as real estate or virtual currency—may be placing their savings at risk.”

Bob Starks has been purchasing real estate for his IRA since 2009. “I do have some stocks and bonds, but 80% of my IRA is in real estate,” says Mr. Starks, a commercial real-estate agent in Duluth, Ga., who owns five rental houses and a small apartment building. He’s also flipped over 20 houses through his IRA. 

Since Mr. Starks is 71½ years old, he’s now required to take required minimum distributions of his retirement funds, so he’s tapping his rental income.

JUMBO JUNGLE TIPS

Here are some things to consider when creating a real-estate IRA. Consult a tax professional or financial adviser for the finer points of self-directed plans.

• Not for everyone. “There are plenty of easy opportunities to invest in real estate using mainstream methods like mutual funds or real-estate investment trusts,” says Mari Adam, a certified financial planner in Boca Raton, Fla. “It only makes sense to do direct real-estate investments if you’re a seasoned pro and are convinced the project you’re investing in is an absolute winner.” 

• Hire a property manager. The best way to ensure that you comply with applicable landlord-tenant laws and avoid prohibited transactions is to hire a third-party professional to manage the properties in your IRA. Expect to pay a commission equal to the first month’s rent and 6% to 10% of the monthly rent thereafter, says Mr. Starks. 

• Distribution options.Some investors take distributions from their real-estate IRAs “in kind,” by having the account administrator actually deed to them a percentage of the property, according to Jason Craig, president of the Entrust Group, a self-directed IRA administrator in Oakland, Calif. “For example, I can take out a 10% distribution and then re-register the asset so my IRA owns 90% and I personally own 10%,” he says.

 

By Robyn A. Friedman 

Originally Published in the Wall Street Journal

San Francisco's Top 10 Private Sales in 2018

2920-Broadway-Street

2920 Broadway Street - $39,000,000

2006-Washington-Street

2006 Washington Street Maisonette - $25,000,000

840-El-Camino-del-mar

840 El Camino Del Mar - $21,900,000

34-Maple-Street

34 Maple Street - $18,500,000

3090-Pacific-Avenue

3090 Pacific Avenue - $16,500,000

3020-Pacific-Avenue

3020 Pacific Avenue - $16,500,000

19-Arguello-Boulevard

19 Arguello Boulevard - $12,800,000

3659-Washington-Street

3659 Washington Street - $12,500,000

2209-Pacific-Avenue

2209 Pacific Avenue - $12,300,000

2090-Vallejo-Street

2090 Vallejo Street - $12,000,000

Buying a Home With an LLC: A Primer

In a world where social media is driven by tweets, likes, posts and shares, privacy is an especially valuable commodity.

To that end, many home buyers and real-estate investors form limited-liability companies with cryptic names when purchasing property. This appeals to the publicity shy, but LLCs also help homeowners avoid scams, identity theft and frivolous lawsuits.

LLCs have long been popular. In Florida, for example, two-thirds (66.6%) of all new business entities formed in 2017 were domestic LLCs, according to the Florida Department of State. But because the Tax Cuts and Jobs Act, in effect since Jan. 1, provides favorable tax treatment to so-called pass-through business entities such as partnerships, S corporations and LLCs, the use of LLCs is expected to explode.

Investors like Scott Wood use LLCs to take title to their real-estate holdings. Mr. Wood, an employee-benefits consultant from Scottsdale, Ariz., sold an insurance business in 2006 for “eight figures” and invested the proceeds in commercial and residential real estate. Each property was purchased in the name of a separate LLC he set up for that purpose.

“My main objective was to be able to safely invest funds and have my assets protected,” he says. “Real estate comes with various unknown risks, and I didn’t want to do it in my own name so people were able to monitor and track what I was investing in. An LLC is simple, easy, inexpensive and protective.”

LLCs are relatively easy to set up, but specific requirements vary by state.

In Delaware, for example—a state popular for business formations of all types—the state Division of Corporations offers a downloadable form that asks the name of the LLC, as well as the name and address of a registered agent in Delaware. The document needs to be signed and filed, and a $90 fee paid. A Delaware LLC must pay annual taxes in the amount of $300.

Although Delaware is among the states that maintain the confidentiality of an LLC’s members, other states require disclosure. In those states, even if a property is purchased under an LLC, it may be possible to discover the names of the true owners of the property.

But while the majority of LLC owners are law-abiding citizens, LLCs can also provide anonymity to embezzlers, drug traffickers, money launderers, tax evaders, those seeking to skirt campaign-finance laws and others who wish to hide or obscure illicit funds.

State Sen. Brad Hoylman, a Democrat from New York City, is drafting legislation that wouldn’t necessarily curb the use of LLCs, but would require that LLCs organized or authorized to do business in New York publicly disclose a list of their beneficial owners.

“In New York, we have very archaic laws around LLCs, which is a great concern,” he says. “In many cases, tenants don’t know who their landlord is. On a larger level, New Yorkers don’t know who is behind many, if not most, of these LLCs—and unlike other corporate entities, even the New York Department of State does not know.”

But some investors say that increased disclosure requirements would have a chilling effect on their use of LLCs. “I would probably do a lot less investing in real estate if I couldn’t have the title held in an LLC,” Mr. Wood says.

Paul M. Fann, a Scottsdale-based accountant who regularly works with real-estate investors to set up LLCs, is concerned that efforts to crack down on LLCs and require disclosure of owners would be bad for business.

“It makes for great public discourse, but it makes no sense for economics and for investing,” he says. “There are fabulous reasons to use an LLC, and states that want our business will not want to alienate investors by requiring openness and more disclosure.”

Originally Published March 7, 2018 in Wall Street Journal

Millennials' New Weapon in Bidding Wars: Parent's Home Equity

Call it the mortgage merry-go-round: Parents refinance their home to fund the full cost of their son or daughter’s desired home. This allows the child to compete as a desirable all-cash buyer in an area where bidding wars are common. Then, when the purchase closes, the child refinances the new home and pays the parents back.

Sellers often prefer cash because transactions can close quickly without making a deal contingent on financing. This is particularly important in bidding wars: If the purchase price is above the list price and appraised value, it may be tricky to get a loan, said Kas Divband, a Washington, D.C., agent with Redfin. Mr. Divband said he has worked on six deals where the buyer was relying on a parent’s mortgage to make an all-cash offer.

The strategy is also evidence of how difficult it is for millennials getting into the housing market for starter homes, where competition is the fiercest. Even those with high-paying jobs and hefty down payments are losing out, particularly in cities with strong job markets for young people, such as Washington, Boston and Seattle, said Nela Richardson, Redfin’s chief economist.

Redfin agent Cody Coffman recently worked with a 20-something Olympic athlete who paid $2.8 million for his first home, a newly built five-bedroom house in Los Angeles’s Venice neighborhood that was listed for $2.758 million. His parents took out a home-equity line of credit, or Heloc, to give him the full purchase price, allowing him to beat out four other offers.

“Educating him on how to talk to his parents was probably the most difficult part,” Mr. Coffman said, since it wasn’t every day their son asked for $2 million. The athlete worked with a loan officer who vetted him before the purchase and also handled his parent’s line of credit.

This move will not work for everyone. Parents must have enough equity in their homes to make a refinance worth it, and the same goes for the child’s new home. Both parties must be willing to take on the added hassle and cost of two loans. And mixing family and money is often fraught.

Here are a few more things to keep in mind:

• Loan options. Parents have several options for using the equity in their homes, including a cash-out refinance, which allows borrowers to refinance an existing mortgage plus an additional amount and take the difference out in cash; a home-equity loan, which is a loan against the value of a home, including a second mortgage; or a Heloc, which works like a credit card, allowing homeowners to qualify ahead of time and withdraw funds when the child is ready to close.

• Finance fail. The biggest risk is that children won’t qualify for a loan—or as big a loan as expected—especially if they pay above the asking price or the market cools. To help avoid this outcome, let the lender know your plans ahead of time, Mr. Divband said. It may be more convenient to use one loan officer for both transactions.

Note that some lenders want buyers to live in a home for three to six months before refinancing. An alternative is a delayed-financing mortgage, which allows a buyer to purchase the home in cash and refinance the day after closing for up to 80% of the value of the home, said Peter Lucia, a production manager at Brecksville, Ohio-based CrossCountry Mortgage.

• Think like a lender. Parents should do the same kind of due diligence as a lender, including vetting children’s finances. Tim Manni, a mortgage expert with NerdWallet, a San Francisco-based personal-finance company, recommends working with a lawyer to draw up a family loan agreement setting out repayment terms and other stipulations. Buyers may also want to get a home inspection.

• Consider the costs. A purchase mortgage or a refinance would typically cost about 2% of the loan value, Mr. Lucia said. Most closing costs would apply to two loans instead of one. Luckily, prepayment penalties are rare on primary-residence loans, though they might apply on investment properties, Mr. Lucia said.

• Tax tips. Givers must report gifts of more than $14,000 per person per year under federal tax law, though an individual must pay taxes only after exceeding the $5.49 million gift-tax exemption, which is a lifetime limit. Interest on the first $1 million of a purchase mortgage is tax deductible, versus only the first $100,000 on a home-equity loan or line of credit. Both parties should consult a tax professional.

Corrections & Amplifications
Givers must report gifts of more than $14,000 per person per year under federal tax law, but an individual must pay taxes only after exceeding the $5.49 million gift-tax exemption, which is a lifetime limit. An earlier version of this article failed to make it clear that an individual owes this federal gift tax only if the lifetime limit is exceeded. (Oct. 13, 2017)

By Leigh Kamping-Carder

Appeared in the WSJ October 13, 2017, print edition as 'Tag-Team Mortgage Financing.'

HOBNOBBING AT THE TOP

By Joseph Lucier    

“You’re the top! You’re the Colosseum, You’re the top you’re the Louvre Museum.” And so, began Cole Porter’s jaunty tune for his 1934 musical Anything Goes. Superlatives abound when the topic of penthouses arise, and why not?  These fabled residences whisper privacy, command inspiring views, and announce the undisputed claim of top dog.  But one wonders what all the fuss is about.  On a recent foray into San Francisco’s penthouse market, I found three maxims to be true.  These apartments carry the undeniable weight of exclusivity, desirability, and intrinsic value. Let’s have a look.

Along the rolling contours of Pacific Heights, Russian Hill and Nob Hill reside approximately fifteen proper pre-war buildings that predate Porter’s ditty.  Some were built as apartments, but the lion’s share was developed as cooperative apartment, doorman buildings modeled after the venerable facades of New York’s Fifth Avenue. Another dozen or so were added in the decades between 1960 and 1985.  Even a baker’s dozen, twice over, offers the owners of these grand perches a swelling sense of pride in a club which they claim membership.  The second and equally important factor to exclusivity is the tenure of ownership that often accompanies these rare birds.  In a recent effort for a well-heeled client to shake one of these apartments loose, I was told by the penthouse owner of Pacific Heights iconic 2500 Steiner Street, “Joe, we are going out feet first!” It’s a common quip and one particular reason it is so difficult to enter this desirable property category.

2000 Washington Street Duplex Penthouse

2000 Washington Street Duplex Penthouse

This storied lack of inventory makes an invite to one of these homes a cause for occasion and, once the visit is over, can kindle a sense of desire.  Yet it is the case no matter your wealth that one is often told they will have to wait their turn to get into the club.  Once the indignation of this reality settles, one of the seven deadly sins often creeps in and whispers, “I want to have this more than anything in the world.”  Any why not?  The exquisite porte-cochère of 2006 Washington Street or the hushed calm when approaching the serene cul-de-sac of 945 Green Street evoke the spirit of a time gone by wrapped in the tasteful architecture of Muessdorffer and Quandt’s elegant designs. But how much will I have to pay, the enchanted, would be owner wonders?

Mr. Porter would mix this potent elixir of exclusivity and desire, pour it into a frosted martini glass, and announce it as “value, simply value, old sport!” This concoction of often generational luxury regularly commands closing prices well above the marketplace. Such was the case when Templeton Crocker’s Russian Hill penthouse sold for an astounding $1,500 sq. ft. in 1999.  The recent purchase of one the city’s crown jewels, the penthouse at 2006 Washington Street, for over $6,000 sq. ft. makes this strong case a reality for the marketplace.  On the flip side, Craig Ramsey’s purchase of Tom Perkins’ Millennium Tower penthouse for $13,000,000 seemed like a deal given the fact that Mr. Perkins was in to the apartment for over $20,000,000.  One bright spot for our leaning Tower of Pisa.

Like the roaring 1920’s, when many of these iconic buildings were realized, the market is again awash in an ocean of money from a strong stock market and another tech fueled bubble.  As our beloved Baghdad by the Bay enters a new chapter, one with a skyline being dotted with pinnacles to new wealth, the rarified air of the penthouse market will continue to be a safe haven for capital and one that will always elicit a sense of mystery and desire.

2500 Steiner Street along Alta Plaza Park

2500 Steiner Street along Alta Plaza Park

TALK OF THE TOWN

Market Beat

By Joseph Lucier    

San Francisco's luxury real estate market is the toast of international markets with an ocean of tech money coursing through the veins of this reinvented gold rush town.  Enjoy my "Top 10" sound bites and market facts on our white hot luxury market.

1.  The estate of venture capitalist Tom Perkins has gone two for two with Sotheby's in the past few months.  On the heels of the estate's $13M Millennium Tower penthouse sale to technology veteran, Craig Ramsey, Sotheby's closed Perkins 1928 Julia Morgan Belvedere estate to an undisclosed buyer this week for $14.46M.

2.  Developer Trumark Urban hit the bulls eye in San Francisco's mature luxury market cycle with over 85% of this 76-unit project sold at Pacific Heights newest luxury address, The Pacific at 2121 Webster Street.

3.  Meg Whitman's son is trying his hand at luxury spec home development after purchasing Billy Getty's home at 2900 Vallejo Street for $12.5M in 2015.  He will test the rarefied air of the spec market at over $20M when this Sutro Architects project comes to market later this year.

4.  Jay Paul's uber-luxe 181 Fremont tops the high end market with a pre-sale contract of over $4400 sqft for unit 68B, a 3000 sqft half floor atop San Francisco's most exclusive residential club.

5.  Developer Grosvernor is developing the darling of the urban infill condominium projects with Glenn Rescalvo of Handel architects.  240 Pacific will deliver 33 boutique units in San Francisco's historic Jackson Square in early 2018. Get in line!

6.  Pacific Avenue has been renamed "Fixer Row" with three grand dames in need of new life closing in the last 30 days for over $10M.  3060 Pacific at $10.25M, 3383 Pacific at $10.225M, and 3515 Pacific at $10.35M.  High end contractors raised a collective glass of champagne. 

7.  Sotheby's is representing San Francisco's most expensive house ever listed at $40,000,000.  Call for more details on this Gold coast home located at 2712 Broadway.

8.  A rare sale of three merged units at Joseph Eichler's 1963 Russian Hill tower, The Summit, closed for $6.87M through Sotheby's.  In competitive bidding, San Francisco architect Geddes Ulinskas won the commission for this dream project.

9.  Family members of 1750 Taylor's penthouse owner are haplessly seeking over $30M in the city's "no inventory" penthouse market.  No takers after six months of private showings.

10.  Market bubble or not, we live in the most beautiful city in the world.  You can take that to the bank.

WE LIVE IN A BUBBLE, LUCKY US!

Market Beat

By Joseph Lucier    
With a potential real estate bubble becoming the topic of conversations all over the city—from cocktail parties to soccer field sidelines—one wonders whether this is a good time to purchase a home. While many people are looking forward, my two decade long tenure at Sotheby’s has shown us that there’s value in stepping back and taking the long view, to see what the recent past might teach us about the future.  
For example, this past decade started as the credit bubble and real estate markets were reaching a bursting point, continued through the worst financial crisis in living memory, and then gave way to the meteoric rise in San Francisco property values, fueled by low interest rates and a voracious surge the Bay Area’s tech sector. 
Joseph Lucier.jpg
How would buyers have best positioned themselves in San Francisco’s residential market 10 years ago?
If Hindsight Realty LLC--my imaginary real estate investment firm blessed with perfect foresight-- had made a single family home real estate trade in 2006, it would have wisely invested in Noe Valley (up 82.1%). We would have also told clients to invest in Cole Valley (up 80.4%), more so than West Portal (up only 52%), though a 10-year bet in Pacific Heights would be looking good in 2016 (up 75%).
A decade ago, Hindsight would have also preferred Atherton to Ross, but it was close: Atherton rose 7.8% per year, compared to 6.2% in Ross.  Outside the San Francisco Bay Area, our clients would have been better off in the Napa Valley. It’s true that the Carmel/Pebble Beach area usually beats the Napa Valley, but not over the past decade.  But really, any of us would be happy to be recipients of the returns of prime locations in Northern California looking ahead in the decade to come.
So what are the greatest lessons from the past 10 years? It’s as much of a risk to be out of the market as in it.  Gains (like falls) tend to come in a rush—as they did in spring 2012.  Hindsight Real Estate gets timing right; you almost certainly won’t.  For those who want to enter or move-up in the market now: Know what you know, and accept what you don’t; there has never been a greater amount of data for buyers or sellers. But one should not confuse information with expert knowledge.  If you are serious about buying in this balancing market, hire a real estate professional with a broad scope of experience to help you identify where the opportunities and challenges lie in the nuanced landscape of this balancing real estate market.
Looking ahead, there are a few golden rules that never cease to be true. Always worry about the purchase price.  You don’t know about future returns, but present values are known, and likely to be extended in the future.  Location, location, location.  Whether the market is up or down when you decide to sell, properties that are well located in San Francisco will always have qualified parties interested and will be better positioned to hold value even in stiff market headwinds.  Identify expansion potential.  No more land is being built in the city, but excavation, re-purposing an attic, or extending your building envelop creates value opportunities beyond market appreciation.
And most importantly, there are many more important things in life than exactly when you buy in a real estate cycle.  Few of us have the privilege not to have to worry about money, but we urge our clients to deliver themselves from the agony of a real estate purchase to the greatest extent possible – and get on with the things in life that really matter...like enjoying your home!

BLUE CHIP HEIGHTS

The Pacific Heights Bet

2865 Vallejo Street

2865 Vallejo Street

1997 - Sold for $1,825,000

2003 - Sold for $2,750,000

2014 - Sold for $6,995,000

2016 - Sold for $7,450,000

 

2204 Pacific Avenue #4

2204 Pacific Avenue #4

1998 - Sold for $1,000,000

2009 - Sold for $2,400,000

2011 - Sold for $2,720,000

2014 - Sold for $3,900,000

2016 - Sold for $4,200,000

 

By Joseph Lucier

Pacific Heights known the world over as San Francisco’s premier neighborhood is home to architecturally significant residences, quaint boutiques, and, of course, iconic views of the Golden Gate Bridge. Since 1996, the median price for a Pacific Heights single family home has increased 367% from $1,200,000 to $5,600,000. The condominium market followed showing a 286% gain to $1,450,000. There have been downturns during this time - most notably the precipitous value drop in 2009-2011; but a long term real estate hold in this blue chip neighborhood remains a wise investment. Even so, buyers (and sellers) often hedge and play the market timing game.

“In 30 years in this business, I do not know anybody who has done it (market timing) successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently.” So were the words of John Bogle, founder of the Vanguard Group of Investment Companies. Cycle after cycle, we continue to note a strange phenomenon with well heeled individuals in the high end market. With a balancing market ahead, sellers need to be careful of their psychological penchant for "rear view mirror" pricing and avoid following the market down to capture reduced gains. During the inevitable market correction, buyers tend to resist the opportunity to buy real estate on sale. This is when the truly savvy take advantage of discount pricing and ride the market when it turns. Again and again in a hot market, we hear, “I am going to wait until the market cools off to buy.” And yes, they do wait…and wait…and wait!  Most agree that timing the bottom (or top) is luck.  Without the confidence of seasoned professional advice,  we always see many “smart” buyers fervently chase each other back to the multiple offer market place after the market turns upwards. Makes sense right? Uh?

"These numbers show one thing for certain. Time is your friend when owning a home in San Francisco. Blue chip properties protect value in a downturn and take the most advantage of a market cycle in full swing."

The reality of purchasing a home often relies on factors outside of market economics. A job transfer, an equity event, a marriage, and downsizing are some of the life events that call for a new home. My advice to San Francisco clients today looking at a mature market cycle is to protect themselves by specifically buying blue chip real estate. Practice time honored fundamentals. Location, location, location. Buy the least expensive house on the best block. Get into the 2000+ sqft condominium market. Of the 2,694 condominiums in Pacific Heights only 427 are 2000 sqft or more. This is a relatively safe sector since buyers are increasingly getting priced out of this neighborhood's single family home market and alternatively choosing to stay by purchasing a large condo.  Playing defense in a balancing market is an astute way to build confidence and be prepared to strike when the right property comes along.

In the last twenty years the Pacific Heights market has topped twice. The 2001 high water mark of $3,684,000 toppled with the dot-com bust, then another peak achieved in 2007 with a median price of $4,037,000. The market took approximately five years each time to climb back to peak values. Currently, the Pacific Heights single family home median price is up 38% from the 2007 top to $5,600,000.  How about that!

What to make of these market cycles when coupled with the lives we lead in our homes? Well - time is your friend when owning a home in San Francisco. Take note that blue chip property protects value in a downturn and is the most advantageous when the market moves again.  I encourage a bet on Pacific Heights real estate as a prime asset to any financial portfolio and a place to enjoy life amidst the San Francisco real estate merry-go-round.

URBAN OASIS

Dolores Heights: A Lesson in Long Term Neighborhood Planning

By Joseph Lucier

The context of Dolores Heights, like the context of the city as a whole, is a tapestry that only grows more intriguing as new elements are added to the weave.  The steep, 400-foot hill itself is more of a definition rather than a destination, framing Noe Valley to the south, Dolores Park to the east and the Castro to the west. From afar it's a rustle of walls and rooflines, green trees and straight asphalt. Many streets within Dolores Heights are dead-end cul-de-sacs connected by steep staircases with beautiful views. Ed Hardy, a resident and renowned antique dealer, happily notes that Dolores Heights remains "relatively warm, sunny and fog-free by virtue of Twin Peaks blocking the strong winds and fog found almost year-round in San Francisco."

dolores park  with downtown skyline

dolores park with downtown skyline

Today this affluent and tranquil neighborhood is a mixture of Victorians, apartment buildings, and detached houses gently rolling down the hill to the recently renovated 13.7 acre Dolores Park that serves as the hub of neighborhood activity and leisure.  But that was not always the case as "residents of the hill fought bitterly over location of the streets the city was preparing to cut into the sides of the hill," wrote The Chronicle in its 1958 piece describing the early 20th century in Dolores Heights. "Everyone wanted the paved street to be at the level of his house - not that of the house across the way, which might be 20 or 30 feet higher or lower." The result was that some streets are split by retaining walls between lanes. Others filled in on one side but not the other.  While families in the area staked their claim with affection and care, mid-century builders slapped in product with no thought for their surroundings.

Now, new houses must align with the guidelines of the Dolores Heights Special Use District established on January 10, 1980 by the San Francisco Planning Commission "to encourage development in context and scale with established character and landscape.”  Resolution #8472 further stated, “Dolores Heights is listed in the Urban Design Element of the Comprehensive Plan as one of five examples of outstanding and unique areas which contribute to San Francisco’s visual form and character and in which neighborhood associations should be encouraged to participate in the cooperative effort to maintain the established character.” 

dolores heights  special use district

dolores heights special use district

While this twelve block gem sits atop its protected perch, the neighboring Inner Mission district beats to the drum of the current tech boom as the latest invasion of cash flushed millionaires snap up real estate that is home to the city’s Mexican and Central American immigrants.  Mark Zuckerberg’s purchase on 21st Street at Fair Oaks in 2012 signaled the beginning of this district's gentrification trend as developers have rushed in pushing property values upward to meet the demand of “time constrained” techies who have an insatiable appetite for move-in condition homes.

CaenLucier tip: While there is still much value growth potential for the Inner Mission neighborhood, we recommend that savvy, long term investors dive in while the property values have yet to skyrocket the way they have in Noe Valley over the past decade.

award winning  dolores heights home

award winning dolores heights home

TECH-TONIC SHIFT

Luxury High Rise Living Redefined

By Joseph Lucier

When the Four Seasons Residences first came available for sale in 2001 as a re-purposed office building, few of the city’s high-end residential agents gave the project much notice. Shockingly after all, it was on Market Street! The St. Regis Museum Tower refined the model a few years later nestling up to SFMOMA at 181 Minna Street followed by Millennium Partners doubling down their bet on the neighborhood and building the first luxury “resident-only” Millennium Tower at 301 Mission Street in 2009. Downtown certainly had come a long way since 1984 when pioneer Ned Spieker developed the city’s first mixed use office/residential building (32 units) at 611 Washington Street across from the Transamerica Pyramid and home to Tommy Toy’s fashionable Chinese restaurant.  

four seasons  (far left),  706 Mission  (center),  St. Regis Museum Tower  (far right)

four seasons (far left), 706 Mission (center), St. Regis Museum Tower (far right)

"It would be highly recommended to take a serious look at this constrained market niche for an excellent long-term investment"

Fast forward to 2016…two more ultra-luxury residential projects are underway this year signaling the maturation of the Yerba Buena+SOMA neighborhood and firmly establishing this new hub of sophisticated living in San Francisco. Between these two buildings, 181 Fremont Street, Jay Paul Company’s mixed-use office/residential tower, and the Millennium Partners 706 Mission Street residential tower, 258 more units will be added to the existing stock of 660 residences at the Four Seasons, St. Regis and Millennium. Most important to note is Millennium Partners decision to reduce the number of units in 706 Mission by 17% allowing for larger units that cater to families and increase the stock for proper residences as opposed to the glut of 1300-1600 sqft units. The 2018 completion date of Salesforce Tower and the Transbay Terminal coupled with the continued march of Class A office development will forever shift the nexus of city living, culture, and commerce from the traditional slopes of Pacific Heights and the venerable corridors of the Financial District to the Yerba Buena+SOMA hub.

An astute investor would be advised to know that only 17% of the aforementioned full service concierge condominiums measure over 2500 sqft. It would be highly recommended to take a serious look at this constrained market niche for an excellent long-term investment and the exciting prospect of living in San Francisco’s singularly true cosmopolitan neighborhood.

 

CIVIC-CENTRIC

The Hipness of Hayes Valley

By Joseph Lucier

When San Francisco commissioned Arthur Brown Jr. to design City Hall in 1913, he went into his bag of tricks from his studies at the Ecole des Beaux-Arts and modeled this civic landmark after Paris' Les Invalides to create an architectural axis to anchor the city after the 1906 quake.  CaenLucier narrows focus this month on Hayes Valley and the fortuitous flurry around the Civic Center. When Ron Conway rattled the cages of Ed Lee's offices, Doug Shorenstein's bet on mid-Market paid off with Twitter deciding against abandoning the city. With Benchmark Capital already across the street in the Warfield Building, it was game on for the tech sector effect on residential values. In an odd way, the 1989 Loma Prieta earthquake followed by Art Agnos' tenacity to tear down the freeways reinvigorated two iconic San Francisco districts... The Embarcadero and Hayes Valley.

Hayes Valley has seen a renaissance like no other neighborhood in town. While the blue collar to white-ish collar transformation of Noe Valley, Potrero Hill, and Bernal Heights has been noteworthy over the past five years, Hayes Valley is truly where the action happens. Traci des Jardin and Bill Russell-Shapiro put their money down on Jardinière and Absinthe, respectively, in the late '90's. In 2012, Randall Kline gifted our city, and particularly Hayes Valley, the Mark Cavagnero designed SF Jazz Center, adding to the internationally lauded opera, symphonic, and ballet companies that culturally anchor the Civic Center. The neighborhood now bumps to a new beat, a beat that embodies hip refinement and satisfies the intellectual curiosity of San Franciscans. Like many districts in town, Hayes Valley has been a hot bed for new development. With over 300 new units in the past four years and another 500 debuting and under development, it's go time for investors and astute residents to invest in this re-imagined neighborhood

 CaenLucier investment tip: The numbers don't lie. In the last three years of this robust market, the median price of neighborhood condominiums is up 38% ($830,000 to $1,150,000) and the single family home sector has climbed 54% ($1,550,000 to $2,400,000) CaenLucier is confident that this district has a continued sustainable and attractive growth curve.  Please consult us for leading edge opportunities in this neighborhood. We look forward to sharing our expertise in your pursuit of adding real estate to your portfolio.

TASTEMAKERS

Inspired Design Enhances Daily Life

By Joseph Lucier

San Francisco has always been known as a city of bold moves, be they social, political, or found in our noteworthy personalities around town, but restraint bordering on insipidity seems too often plague San Francisco's architectural landscape.  Love it or not, fervent opposition is a native trait of the City's residents, but it has been hurdled before to yield landmarks known the world over.  The Transamerica Pyramid, designed by architect William Pereira in 1969, comes quickly to mind as detractors during planning and construction sometimes referred to the design as "Pereira's Prick". John King of the San Francisco Chronicle summed up an improved opinion of the building in 2009 as "an architectural icon of the best sort - one that fits its location and gets better with age."  Yet where is the opposition found today towards “safe bets” that developers deliver to planning and, thus, usher to the marketplace when current economic opportunities could equally fuel cutting edge design, top quality materials, and high caliber construction meant to inspire buyers and residents alike?

This high/low conundrum begs the proverbial question between developers and consumers of who is the chicken and who is the egg.  While we were all Millennials at one point, albeit as Baby Boomers, Gen Xers or Gen Y, who likely entered the market without a well-defined sense of taste, the question remains; can the risk of higher investment for quality materials coupled with exciting architectural design be delivered by developers and applauded by consumers?  In the late 1990’s the architect David Baker and Holliday Development redeveloped the Clock Tower building at 461 2nd Street as uniquely designated “live/work” lofts.  This 1907 building, originally constructed for the Max Schmidt Lithograph Corporation, offered a new product to buyers who excitedly embraced the exposed brick and timber components and were introduced to open plan New York loft living. Not only was the live/work designation tenaciously fought for by the developers, these lofts were cool!  The market responded positively leading to further investor confidence with the 1996 redevelopment of the Oriental Warehouse at 650 Delancey Street, ultimately adding more high quality housing stock of lasting integrity.

David Baker's innovative  clock tower lofts

David Baker's innovative clock tower lofts

Fast forward to 2014 with Stanley Saitowitz’ 8 Octavia Street rising from a triangular lot left bare after the destruction of the Central Freeway.  Saitowitz is a big thinker and a bright spot in the city’s architectural discourse.  He feels that "architecture is a frame, an open field which facilitates the dreams and desires of the inhabitants. In this way architecture can be viewed as an instrument, a way to extend the exuberant parts of life, a tool for liberation." In an ocean of floating milk toast that the SF Planning Department often unwittingly finds itself wading through, 8 Octavia gave the City an opportunity to embrace the shock of the new. DDG's (the developer) investment of economic and intellectual capital paid off hopefully inspiring future sentinel attempts to stave off less inspired designs imposed on residential marketing firms.  With 47 units and a ground floor retail component, 8 Octavia had the ability to spread out risk on the balance sheet, but what is to be done to support San Francisco’s tastemakers burning desire to express a bold move residing on a singular property?

stanley Saitowitz design  at 8 octavia

stanley Saitowitz design at 8 octavia

As the ante moves up in the world of luxury single family home redevelopment, we re-engage the chicken vs. egg paradox with all of the eggs falling into one basket.  I certainly applaud any developer who puts on his investor’s cap to accurately assess the economic factors and consumer tastes required to make a profit, but tastemakers must unflaggingly resolve the uncertainty of being rewarded for a project that rigorously takes on new design theory, uses exotic (and expensive) materials, and boldly informs the market on what THEY consider important. Do we really have to see yet another $8mm+ spec house with a bowling ball plan entertaining level punctuated with a Carrera marble kitchen island leading to a wall of glass Nano doors with no sense of progression, no mystery, and therefore, no true allure and passion? Please say no!  Real estate agents wave their hand to the tune of hundreds of thousands of additional dollars saying that the developer “offers a blank canvas” for the new buyer to make the property their own.  Let us encourage developers to play offense and personally take on these blank canvases instead of kicking them down the road to the marketplace.

uninspired formula  developer product delivered to 2015 market

uninspired formula developer product delivered to 2015 market

I believe there is a market for the tastemakers who are willing to risk investment and inform San Franciscan's on what is chic and how inspired design can enhance daily life.  Baker and Saitowitz have shown that we collectively await developers willing to show us what can be and what we can embrace.  Developers willing to harness the winds of innovation, creativity, and technology, the true lifeblood of the San Francisco Bay Area, will be patiently rewarded by those seeking the allusive framework of high quality design and construction during these interesting times.