The DeLeon Insight - March 2015 by DeLeon Realty

The DeLeon Insight Silicon Valley Real Estate March 2015

Local Specialization, Global Reach, Integrated Approach • Strategies for finding a bargain • Tips for making your home eco-friendly • Understanding the cost of a contingency

March 2015 DeLeon Insight 1

www.deleonrealty.com

The DeLeon Update: Market Trends Change in Average Sales Price 2014 & 2015

Contingent Real Estate Offers—The Efficient Assignment of Risk By: Michael Repka, Esq., DeLeon CEO/Managing Broker

01/2014 - 2/28/2014

01/2015 - 2/19/2015

Average sales price for single family residential homes from 1/2015 to 2/19/2015 increased when compared to the average sales price during the same period in 2014, except Woodside.

Change in Average Price/Square Foot 2014 & 2015

01/2014 - 2/28/2014

01/2015 - 2/19/2015

Average price per square foot for single family residential homes along the Peninsula increased from 1/2015 to 2/19/2015 compared to the same period in 2014, except Woodside and Los Altos Hills.

here are a lot of theories out there regarding the use of contingencies in real estate offers. Unfortunately many agents and buyers shift towards absolutes, such as “all offers have to be non-contingent in this hot seller’s market” or “the buyers should always have a financing contingency because you never know what the bank might do.” The problem is that “rules” like these do not take into consideration the particular facts of a transaction, property, buyer, or seller. The best approach is to collect and analyze all of the information available and include any contingencies that are necessary, but only those contingencies that really are necessary. Although this sounds simple, it is not always done that way. Much of this analysis should occur long before the buyer identifies the target property. For example, a well advised client will know the maximum amount of a loan for which they will qualify well before they put in an offer. A good loan officer will provide candid guidance when the buyer is getting too close to their limit. If the loan officer says that buyers should always have a contingency, then the buyer should consider finding a different loan officer. Similarly, a good real estate agent will tell a buyer whether a home is likely to appraise. If it might not appraise, then the buyer should decide whether that matters to them and whether it impacts their ability to get the loan. If they are putting enough down, or they have extra cash to put down, then it may not. On the other hand, a buyer that can only proceed if the property appraises for the full purchase price should consider the inclusion of a contingency even if it could jeopardize their chances of getting the property. Naturally, sellers will assume the worst when they are evaluating an offer with a financing contingency. After all, why would a buyer ask for the ability to walk away from a transaction if they don’t get financing

unless they really believed that there is a material chance that they won’t be approved for the required loan? Although some agents are instructed always to recommend inclusion of a financing contingency, even if the buyer is strong, sellers will wisely assume that the buyer’s finances are in question if the buyer sees the need for a contingency. Thus, a wise buyer will only include a contingency if they really doubt whether they will be approved. Some overly conservative agents actually warn sellers against accepting a noncontingent offer. The rationale is that sellers should give buyers an opportunity to inspect the property and cancel the deal if they are not satisfied so as to avoid a potential

lawsuit. I believe this is unnecessary and unwise, especially in multiple offer situations, because the language included in the PRDS contract that is used in most local real estate transactions is so broad and subjective. Buyer’s remorse could lead a buyer to concoct a reason to get out of the contract under the property contingency, even if there is nothing wrong with the property in the seller’s eyes. This would leave the seller in the unenviable position of having to go back to the other buyers and try to recreate the excitement of offer day. There is always a cost to the inclusion of a contingency. The key question is whether the actual risk avoided justifies the cost of the contingency.

*Data gathered from the Multiple Listing Service on 2/19/2015

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Finding a Real Estate Bargain—Fixer-Uppers

Location, Location: Is Central Portola Valley the next Lindenwood?

By: Holly Nugent and Michael Repka, DeLeon Listing Team DeLeon Listing Specialist & DeLeon CEO

By: Ken DeLeon and Rob Parish DeLeon Founder & Atherton/Woodside/ Portola Valley Specialist

ith home prices surging in the thriving Silicon Valley real estate market, buyers are constantly on the hunt for—and turning to us for advice on—the ever-elusive bargain. At DeLeon Realty, our team of in-house designers, contractors, handymen, and a construction consultant all collaborate on our listings because we have found that the majority of buyers look for a pictureperfect, move-in-ready home. With this in mind, we generally advise our sellers to invest in upgrades that will give their homes that fresh and newly refinished feeling, like painting, refinishing floors, landscaping, and even minor remodeling or re-facing of kitchens and bathrooms. Often the investment is minimal, yet we typically see at least a three-fold return on their investment in terms of final sales price. After the home preparation process is over, many sellers have the same response, “Why didn’t we do this work sooner? We would have been able to enjoy the outcome while living here!” Here is the good news for you bargainhunting buyers. Prior to bringing their homes on the market, not all sellers are willing to invest in upgrades; many agents don’t even recommend the changes, relying

instead on the idea that the market is so hot, anything will sell. Although a small handful of these unloved homes will sell, they will sell for less than top dollar due to their flawed aesthetic appeal. Often these properties have excellent “bones”— good locations, sound structures, fine floorplans—but the kitchen or bathrooms may be dated, or perhaps a “vanilla” interior could be perked up by some elegant crown molding and baseboards. Easy fixes like these allow savvy buyers to put their stamp on the home, while simultaneously increasing the value considerably. With investments of as little as $50K-$100K, we regularly see an increase in resale value of a home by several hundred thousand dollars. One would think that, with this kind of equity potential, these “fixer-upper” homes would be highly coveted. However, we see quite the opposite. With most buyers focused on turn-key homes, and with most

developers seeking tear-downs or lot value, these in-between homes are overlooked by the majority of buyers. Of course, buyers have to look at these “project” homes with caution (and good counsel), but for many buyers, this can be a way to climb the property ladder with relative ease. For example, say a couple invests in a fixer property and plans to live in the home while slowly making improvements over two years or more. This couple will build equity in the home with the work they do and, after living there for two years, the home should qualify under Internal Revenue Code Section 121 as their primary residence, which enables a married couple to exclude up to $500K of capital gains from taxes. The gain could then be added to the down payment on a more expensive fixer, with an even greater return on investment, and on you go, up the ladder to your dream home!

s Palo Alto, Atherton, Menlo Park and Los Altos have just finished another year of double digit appreciation, value-oriented buyers are realizing that Westridge and Central Portola Valley present an extraordinary opportunity. To put the relative disparity in perspective, $3,600,000 purchased an original 2051 sq. ft. home on a 7,200 sq. ft. parcel in Crescent Park in August 2014. For the roughly the same amount of money ($3,650,000) during the same month, another buyer in Central Portola Valley bought a 4,912 sq. ft. remodeled and expanded ranch home on a 61,420 sq. ft. parcel. The combination of open space, great schools and increased privacy is very compelling. A similar disparity lead to the transformation of Atherton’s Lindenwood neighborhood between 2010 and today. For decades, Lindenwood was the most stable of Atherton’s neighborhoods because of the uniformity of the housing stock (488 homes built primarily in the 1940s-50s on one-acre lots). People seeking to build trophy estates chose other locations. However, that all changed in the last 5 years. Three factors contributed to this stellar appreciation: the incredible public schools, record low interest rates, and Facebook’s decision to locate its headquarters just a mile away in Menlo Park. Builders and buyers started competing for the classic ranch houses and began building exceptional dream homes.

The competition is still fierce, although the number of remaining unremodeled ranch homes is sharply declining. Indeed, the price of unremodeled 1948 home (3,090 sq. ft.) on an acre in an excellent central location reached $5,000,000 last August.

Comparable market forces are at work today in Central Portola Valley (MLS Area 236): • The 954 homes in Westridge and Central Portola Valley are primarily older ranch homes from the 1940s-50s on lots of one acre or more, often with views. • Interest rates remain low. • The Portola Valley School District is among the area’s top public school systems. • The vibrancy of the Silicon Valley economy mean that job growth and compensation plans are climbing.

Two other ingredients are also encouraging the gentrification of this area. First, the initial wave of these new homes/ extensive remodels have been completed and established a market for trophy homes. In the last two years, were 11 sales in the $5,000,000-$10,000,000 range, providing a critical mass of comparable properties for valuation/appraisal purposes. Second, buyers are increasingly frustrated with traffic issues along the Peninsula, especially on Highway 101. Buyers regularly define their search areas in terms of minutes to work, and Interstate 280 is becoming the commuting route of choice. Here are some general highlights of the 2014 Portola Valley Market: AVERAGE PRICE With a population of 4,353 residents living in 1,746 total housing units, the total number of Portola Valley home sales each year isn’t a large figure. However, the average sale price of a single family home climbed from $2,430,783 in 2012 to $2,727,000 in 2014, while the median sales price climbed 12% to $2,465,000. INVENTORY As of 2/12/15, there are only three active listings in all of Portola Valley. TIME ON MARKET The average number of days on market dropped from 67 days in 2012, to 49 days in 2013, to 44 days in 2014. More importantly, 51 properties brought to market during 2014 in sold in 14 days or less, and 54% (46 properties) sold for more than list price.

* Note: This table was prepared on February 12, 2015. Occasionally, properties are withdrawn from the MLS without reporting the final selling price. A search of title records provided the selling price for the pertinent property.

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The Impact of Foreign Investment on the Silicon Valley Real Estate Market By: Michael Repka, Esq., DeLeon CEO/Managing Broker

he confluence of a vibrant economy, ideal climate, and intellectual capital draws people to Silicon Valley from around the world. This melding of cultures, ideas, and approaches only serves to intensify the appeal of this area. As the demographic profile of the area changes, so does the real estate market. These changes can be seen in increases in construction, all-cash offers, shrinking inventory, and resultant appreciation, especially in areas with top-performing schools. In order to understand the shift in the local real estate market, it is helpful to consider the places from where the buyers are immigrating. By and large, foreign buyers hail from large cosmopolitan areas with strong education and high-tech industries. These areas include Taiwan, the Chinese cities of Beijing, Guangzhou, and Shanghai, the Indian destinations of

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Bangalore, Chennai, and New Delhi, and emerging economies like that of Vietnam. Generally, these areas share a few similarities. First, “nice” is often synonymous with “new.” The most affluent and desirable areas tend to have a breadth of new construction. As a result of this ingrained belief, many of the people who relocate to the States favor new or newer construction in very good condition. Thus, a grand dame of a home in Old Palo Alto that would appeal to New Yorkers and even many Europeans may be passed over in favor of a newly constructed home with an in-law suite in Midtown. However, people of all nationalities vary in personal taste and preference. Occasionally, the marketing of properties that cut across typical trends yields strong results because these ads stand out from the more expected homes. We saw this

in a recent historic Victorian we listed in Palo Alto, which saw robust open house attendance thanks, in part, to ads in the Chinese newspaper and on Chinese radio and television. It is also of note that smaller lots found in many parts of Palo Alto and surrounding areas may not deter buyers

from countries where land is limited and housing is dense. Therefore, not surprisingly, the convenience of Palo Alto may hold more appeal than the rural charm of places like Woodside or Portola Valley. Once foreign buyers have found the perfect house, they need to submit an offer that will be considered competitive in this hot seller’s market. Fortunately, foreign buyers tend to favor all-cash purchases for a combination of cultural

and practical reasons. On the cultural side, many countries do not share the American acceptance of debt—especially long-term debt. On the practical side, it is simply harder for buyers to obtain credit when the majority of their income and credit history exists outside of the United States. While some banks, most notably HSBC and Citi, have begun to lend based on international credit history and foreign income, the approval process takes considerably longer. Although all-cash offers may be both more convenient and competitive for the well-heeled foreign buyer, this may not be possible for many foreign buyers. Therefore, sellers evaluating multiple offers should consider the reasons for a longer requested escrow period and weigh the offer’s strength in light of the circumstances. In addition to the impact on the offer process, the shift in demographics over the past 20 years has reduced housing inventory. The typical “American dream” of home ownership involves a consistent upgrading of homes throughout one’s lifetime. Generally speaking, college graduates save money for a down payment, buy a condo or small house to live in, and then desire a larger home as they begin to build their families. Most often, they will sell their first property and use the proceeds as a down payment on their next property. However, many foreign buyers utilize a buy-andretain strategy. When it is time to upgrade, many foreign buyers retain old properties as investments. Thus, there are fewer and fewer properties coming on the market each year. By way of example, there were 38 homes listed in Palo Alto in the first 15 days of February in 2010, but only 22 homes listed during the same period this year. Naturally, this reduced inventory contributes to the strength of local real estate prices. While it is inappropriate and, in fact, illegal for a seller or real estate agent to steer people of a certain ethnic group towards one house or area, it is wise to remain cognizant of cultural factors that may impact the potential buyer pool. This can range from advertising in foreign language papers, staging the home to appeal to foreign buyers (e.g., considering feng shui elements), and weighing offer strength in light of all

circumstances. Foreign buyers, most notably from China, continue to be an important portion of the buyer pool. We anticipate this trend to continue well into the foreseeable future, especially in light of shifting policies and regulations in China and relaxed visa requirements. (See Kim Heng, “Obama’s New Visa Law Opens the American Door to Chinese Buyers,” DeLeon Insight, January 2015). Therefore, for 2015 we are further intensifying our marketing towards China through premium relationships with several real estate sites that are behind the “Great Firewall of China.” Additionally, we will send several of our key people, including Ken, Kim, and myself, to join with our counterparts in China in hosting booths and promoting

our listings at two different trade shows in Beijing in April. We will also participate in trade shows in Guangzhou and Shanghai later in the year. Although these trade shows, in and of themselves, are not enough to develop strong relationships with affluent buyers in China, they are a great addition to our multi-faceted approach.

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What Makes A Home Sustainable? By: Jillian Mrsny DeLeon Interior Designer

ustainability is a term that is broadly used to describe materials and products that meet our current needs without negatively affecting the environment for future generations. If you are looking to add sustainable value to your home, we have a few helpful tips for you in planning your next renovation. An old bathroom can be a great place to start when creating a more sustainable home. As you are selecting your new bathroom materials, try using a few timeless and durable products, such as recycled glass counters and tiles made from reused bottles. Other innovative companies offer unique wood-textured countertops made from 100% post-consumer paper. If you are looking for less dramatic updates to your bathroom that will also help lower your water bill, look into installing lowflow toilets, faucets, and showerheads. With water conservation at an all-time high in California, many water utility companies and cities are offering their customers free

water-saving home updates, rebates, and tools. Check in with both your local utility company and your city to see if you can save on your next home renovation. Studies show that your home’s lighting makes up about 25% of your energy budget. Updating light fixtures with more energyefficient bulbs will not only lessen your carbon footprint, but will also diminish your electricity bill. Two revolutionary energy-efficient bulbs, both of which possess longer-than-average lifespans, are LEDs (Light Emitting Diodes) and CFLs (Compact Fluorescent Lights). One great feature of LEDs over incandescent bulbs is that the light is more directional, making them ideal for recessed and under-cabinet lighting. In contrast, CFLs are excellent replacements for your general home lighting needs, such as table and floor lamps, since they offer light that is similar to incandescent bulbs. CFLs are also less expensive than LEDs, but they are more difficult to dispose of because of their mercury content. Before you make any commitments to one particular bulb type, purchase a couple of each to try out. You may gravitate towards one type for certain

applications and another type for other uses. Flooring is also an easy way to improve a room while maintaining an eco-friendly theme. Sustainable flooring materials, like cork and bamboo, are now offered in unique colors, patterns, and applications. Cork is a great insulator that is currently offered in mosaic patterns, ceiling treatments, and even wall tiles. Tile companies have also made their mark in the realm of sustainable flooring by designing tile planks that resemble rare hardwood materials. Reclaimed wood floors are also a popular alternative to more expensive exotic woods. Not only are these flooring options dazzling, but they also have distinct salvage history with materials sourced from old mines, commercial spaces, stadium seats, and even off-cuts from furniture making. When we think about sustainable living, we often expect both high prices and having to sacrifice the looks we really want. Thanks to advancements in manufacturing and product design, these sacrifices are a thing of the past. We hope you will keep these options in mind when planning your next home renovation.

DeLeon Realty Celebrates a Record-Breaking Year By: Michael Repka DeLeon CEO/Managing Broker

or the DeLeon team, 2014 was a phenomenal year. Our sales soared 65% to approximately $559 million—a number never achieved by any Northern California Realtor® or team. In fact, our team’s sales volume exceeds all but a few local brokerage offices, despite the fact that most offices aggregate the sales of scores of individual agents who are independent contractors, rather than actual employees of the company. Without question, our business model differs significantly from the commission-based approach used by so many agents in the industry, and clients have enthusiastically embraced it. Our combination of salaried specialists, aligned incentives, and a new, locally-focused website, www.deleonrealty.com, all came together beautifully in 2014, handing us our best year ever. To celebrate, Ken DeLeon, our inimitable founder, invited all 40 employees hired by July 1st and their guests on a sevenday cruise to Mexico. This was a perfect

opportunity for everyone to celebrate, relax, recharge, and deepen the bonds that contribute to our team’s great collaboration. A wonderful time was enjoyed by all. The DeLeon team’s success also enabled us to give back to our community; we donated over $100,000 to local schools in 2014. Additionally, Ken and I deepened our understanding of international real estate

practices through slow-season trips to visit our counterparts at real estate companies and construction projects in India, Russia, and, of course, China. We truly appreciate all of the wonderful clients, vendors, and colleagues with whom we have worked over the past year. 2014 was a terrific year, and 2015 is off to a fantastic start.

2014 Market Share2 1/1/14 to 12/31/14 #1 #1 #1 #1

#2 Atherton Overall - Silicon Valley #2 Mountain View Overall - Our Cities1 #3 Los Altos Hills Palo Alto #4 Los Altos Menlo Park #5 Portola Valley

1 Includes Palo Alto, Menlo Park, Atherton, Los Altos, Los Altos Hills, Mountain View, and Portola Valley. 2 These rankings come directly from BrokerMetrics, an independent third party that complies information directly from the Multiple Listing Service (“MLS”) for the period January 1, 2014 to December 31, 2014

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Upcoming Listings

20 Ohlone Street, Portola Valley

199 Mapache Drive, Portola Valley

Woodland Splendor in Portola Valley Ranch

Sprawling Home on Peaceful Property

Touting a light-filled design, woodland setting, and lavish amenities, this contemporary home offers skylights, oversized windows, and two fireplaces. Multi-level decks deliver sweeping views of nearby foothills, and the quiet, sylvan neighborhood presents multiple recreational opportunities.

Unwind in the serenity of this sweeping property, which includes a private well and bubbling creek. Given the large residence and flat, buildable lot, this home presents the ideal opportunity for expansion, or even new construction.

101 Alma Street #907, Palo Alto

Woodside

Sky-High Living in Downtown North

Exceptional Opportunity for Future Estate

Enjoy downtown Palo Alto at your fingertips, in addition to the extensive city views and spacious rooms this home affords. As part of the Palo Alto Condominiums, here you can savor access to fine facilities, plus a central location that is within blocks of dynamic University Avenue.

Seize the chance to own this staggering property of over 20 acres. Trumpeting sensational vistas, unrivaled privacy, and terrific proximity to Silicon Valley attractions, this exceptional home is down the road from the celebrated Filoli estate.

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1 Portola Green Circle, Portola Valley

115 Eleanor Drive, Woodside

Storybook Manor is Enchanting Retreat

Custom Estate Draped in Luxury

Celebrate the unforgettable charm of this home, which heralds romantic touches like a turret dining room and over 40 stained-glass windows. Located in an exclusive enclave, this sprawling residence includes intricate details, gorgeous rooms, and an incomparable setting.

Luxuriate in the quiet splendor of this exquisite home. A lush property outfitted with ravishing rooms and beautiful amenities, this gated estate boasts stunning views and a multitude of custom features throughout the home.

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PRSRT STD ECRWSS U. S. Postage Paid Palo Alto, CA Permit No. 1

DeLeon Realty 2600 El Camino Real, Suite 110 Palo Alto, CA 94306

LOCAL POSTAL CUSTOMER

How to Find a Bargain in a Hot Market Wednesday, April 22, 2015 7:00 - 9:00 p.m. Please join DeLeon Realty for a seminar focused on finding the best bargain this upcoming April 2015. You will gain invaluable insight into the real estate market from the most successful real estate agent in Silicon Valley, Ken DeLeon. Also, meet Michael Repka, our managing broker and general counsel, and DeLeon Realty’s talented area specialists, who focus on specific neighborhoods throughout Silicon Valley. To RSVP, please contact Anastasia Koroleva at 650.543.8505 anastasia@deleonrealty.com

Venue: Palo Alto Hills Golf & Country Club, Grand Ballroom 3000 Alexis Drive, Palo Alto

12 DeLeon Insight March 2015 650.543.8500 | www.deleonrealty.com | CalBRE #01903224