Market Update This is the current quarterly newsletter written and designed by me. It is distributed to all Marin income property owners and is also available upon request. < BACK Winter 2008 Marin Market Update & Rental Survey Michael is specializing in the sale of Marin residential income property. Michael has been doing this since 1973. He is one of the few agents in Marin that specialize and limit our practice to apartment sales (2+ units). Last year Michael was involved in over 14% of all Marin's duplex and triplex sales. Over the last ten years, on average, he has represented the seller or the buyer in 15% of all 4+ unit sales - that is about one of every six sales. Michael is Marin's top apartment agent and has been for many years. Income property sales involve a need for an expertise that not all agents have. Since many sales involve tax-deferring techniques, more than a casual knowledge of tax laws and practice is necessary. Income and expense statements must be analyzed, leases must be reviewed and tenant estoppels drawn. Showing income property vs. houses is different. One cannot tour agents and buyers through rental property as you would a home; you would have a tenant uprising. Whether you are selling or buying a duplex or a 30-unit apartment complex, you deserve someone specializing in Marin income property representing you. Michael has been doing so for over 25 years and is the top producing agent in this field. Greenspan & Easy Credit The short version of what happened recently in the housing market - Alan Greenspan before retirement, cut interest rates far beyond where they should have gone. This resulted in an unprecedented drop in real estate interest rates. If you could come up with the down payment and qualify for a loan, why rent? And those that could, stopped renting and bought. If that were the end of the story it would have just been a normal upward blip in prices due to increased demand. Wall Street loved buying up packaged real estate loans. To accommodate this demand, lenders had to get more money out. Forget about qualifying for the loan. If one has good credit and the down payment, it is no longer necessary to prove that you can afford the loan. State that you can afford it and the lender will believe you (stated income loan). Lenders still could not get enough money lent! They started lowering the down payment requirements. Not only do you not have to prove that you can afford the loan, you also do not need the down payment; just have good credit. The demand for homes surged with the availability of easy money. Would be new home buyers left the rental market to seek home ownership. Home prices rose dramatically. Multiple offers over the asking price and quick closes were the norm. This could not continue. At some point someone had to wise up that many of these new home owners were in way over their heads. Step one; banks stopped making those ridiculous loans. Step two; everyone else panics. When it became obvious that many of these loans may go bad, Wall Street shut off the faucet by stopping the purchase of almost all loans until they could figure out how big the mess was. This abrupt shut off of funds caused a few major lenders to close their doors. With most lenders out of the market, those that were still lending charged, of course, a premium interest rate and they made you qualify for the loan again (what a surprise). With all of the easy money no longer available, this new found set of buyers evaporates. Unfortunately they represent 20-30% of the buying market. What do prices do? In Marin, they stop rising. Most everywhere else, they fall. This does not even address the sub-prime market you hear about in the news. This stuff is just basic common sense as to what happened. It will get back to normal. There was too much appreciation for no good reason. It has to balance out. 4+ Unit Update The apartment building market ended the year in a healthy state. Unlike the residential market where the number of sales has fallen off tremendously over the last few years, apartment sales volume was pretty much on target and hitting the averages. In any given year I do not have that many apartment sales to start with. 4+ unit sales total between 30 - 60 transactions in any given year. Over the course of the last 12 years there have been an average of 47 sales per year. 2007 saw 42 sales. This was up from the 38 sales recorded in 2006. The years 2003, 2004 & 2005 posted some of the greatest sales volume with 59, 62 & 55 sales respectively. I represented the Buyer or Seller in 12% of all 2007 sales. If you take out the private or "non-market" sales, our percentage increases to 16% or about one of every six sales. I have handled over the last 12 years approximately 15% of all apartment sales. Thank you for keeping me the number one agent in Marin apartment sales. 2-3 Unit Update For the three years leading up to 2007, Marin had 85-95 Duplex and Triplex sales each year evenly spaced throughout the year. 2007 witnessed a major change. Sales were off during the first half of the year but slowed even further in August when the problem in the lending market created the same difficulties for smaller rental properties as single family homes. Overall sales were only 40% of what they had been averaging. Quality, well priced properties are still selling. In my weekly e-mail update I highlight "Best Buy" picks when available. These as well as my own listings are selling. Buyers are waiting for the right property, properly price. When it comes on the market, it is still not uncommon to receive multiple offers. Seller's expectations are becoming more realistic. Properties sold at an average of 93% - 99% of their original asking price in 2007; a significant improvement of 89%-97% in 2006. Sales continue to happen, albeit at a slower pace. Days on market (DOM) for sold properties has risen to just over 100 days; up from the 75 day average of 2006. 2008 Predictions Interest rates have come down dramatically from six months ago and I expect them to remain stable or inch further down. The 10-year Treasury bill at this writing is under 4% and was as high as 5.3% earlier this year. Many 3-5 year fixed loans mirror the direction of this index. The 11th District Cost of Funds Index is currently at 4.17%. This is well off its high of a year ago. This had been the main index for adjustable rate loans and unless you have refinanced, may still be the index of your loan. Rents will continue on a rapid rise. The trouble in the residential real estate market and the exodus of first time buyers puts tremendous pressure on the rental market. We will probably be talking about potential problems with rent control long before we talk about rents falling again. Home sales volume in the Greater Bay area is off 23% from a year ago. According to Frank Nothaft, chief economist at Freddie Mac, "Our latest forecast has total home sales (nationwide) continuing to decline in the first quarter of the year before starting a slow recovery." Robert Kleinhenz, deputy chief economist of The California Association of Realtors, said "A real recovery in the housing market is probably at least a year off". On a positive note, the consumer confidence index just reported its first rise since July 2007. Unlike the residential home market, I expect continued demand for Marin's investment rental properties. Apartment values in Marin have been stable for the last 18 months and I expect them to remain stable into the near future. We are in the middle of a prolonged flat period similar to the early 90's. "Off Market" Sales While the total number of sales came close to the average this year, a surprisingly large number of sales were "off market". By this I mean sales that were between Buyer and Seller directly or put together by an agent without exposing the property to the open market. Of the 42 sales last year, 11 were "off market" transactions (26%). This is considerably above the norm. I am not sure of the reason for this. The good news is that the buyers are out there looking for properties. Given this level of buyers; however, I am concerned that many Sellers are potentially leaving some money on the table. To ensure you receive the highest price, properties need to be fully exposed to the market. The appraisal definition of "market value" includes this requirement. At any given point, there may be more than one Buyer that would be interested in your building. If I represent the Seller, I strongly advise them to let me market the apartments before accepting an offer. I do represent Buyers in an "off market sales", but make it clear to all that I am only representing the Buyer. It is tempting to look for an offer without going through the seemingly difficult process of having your apartments on the open market. Often Sellers just let agents know that they would sell at a certain price but do not want their building marketed. They just want someone to make them an offer - someone just might! Unless you have been very well advised on value, you will not know if that offer or even the price you wanted was the highest you could obtain. Let me properly expose your property to the market. You will be money ahead. Marin Rental Update It is time once again to look at our quarterly update on rents. This is a service I have been providing readers since 1992. It is a compilation of rents advertised in the Sunday Marin Independent Journal for the preceding quarter as well as the rentals offered in "Craig's List". Historically, 1995-2000 saw a period of rapidly rising rents with some rents rising 20% annually. Starting in the 2nd quarter 2001, we saw the market rapidly change. Rents declined, vacancy rates increased and many owners offered concessions to keep or get apartments rented. The rental decline bottomed out in 2005 and rents are back on the rise. Rents have been up throughout 2007 with the largest increases being recorded in the fourth quarter. The 2007, 1BR average rent has risen 10.7% over the 2006 average. Fourth quarter 1 BR rents are up 16.4% over 2006. 2007, 2BR average rents have risen 9.6% over 2006. Fourth quarter 2 BR rents are up 13.2% over 2006. Vacancy rates are averaging a healthy 2-4%. Until recently Southern/Central Marin and San Rafael were the only recipients of rapidly rising rents. Novato's rents have been mainly flat. 2007 saw Novato's rents rise by 3-8%. If you have not given a rent increase for years, it is time to start again. If you do not give your tenants annual rent increases to keep close to market, you will quickly get left behind. A Service Business Our business is a service business. Most of the services I provide are for free. I do this in hopes of receiving your future business of buying or selling an apartment building after I have had a chance to help you and demonstrate our services and expertise. Take advantage of this. Let me know how I can be of assistance; a valuation of your building, a market update on conditions, a pricing opinion of another property on the market for sale or just how a property should be marketed. Give me a call. Michael Burke Michael has specialized in Marin Investment sales over 25 years. Michael serves as chairman of the Commercial & Investment Committee for the Marin Association of Realtors, on the board of directors of the Marin Apartment Owners Association and the board of directors of the Marin Association of Realtors. How to get in contact... Readers are encouraged to submit real estate investment-related questions and suggestions for future monthly magazine columns. Correspondence can be addressed or faxed as follows: Michael J. Burke, Frank Howard Allen Realtors, 511 Sir Francis Drake Blvd., Greenbrae, CA 94904, (415) 925-3214, fax 461-2800. E-mail: mburke@fhallen.com. Internet web site: www.marinapartments.com. Whether a Duplex or a 30-unit complex, Let "Marin's Income Property Specialist" represent you! Built by WebSight Design