Bay Area Real Estate

By Anton Blewett, Cell: (650) 996-2028

Step 1: Select Desirable Location Characteristics
Do you want to live on a quite street, away from traffic? Are you willing to commute a long distance to get the amenities you desire? Or is a shorter commute—say, no more than half an hour—a quality-of-life issue for you? Do you have a large enough family that four bedrooms is a necessity, or can you live with three? There are many specifics about an area that are important in making a location decision, including type of households residing in that area, job opportunities, affordability, safety, climate, education, transportation, hospital and medical services, sports, parks, recreation, entertainment, downtown, shopping, view, culture / ethnicity, religious organizations, hills, water, and so on.

Step 2: Prioritize Your Needs and Wants
Rank, sort and prioritize your list according to the different characteristics. For example, the top priorities for a young household without children are likely affordability, commute, entertainment and recreation. On the other hand, education, safety, parks and low-to-medium household age are top priorities for a household with children.

Step 3: Identify Local Areas with the Characteristics You are Looking For
Prioritizing characteristics narrows the available pool of local areas. For example, if ocean is a top priority, then the list of available areas shrinks to coastal cities. Since I study the neighborhoods daily and work with clients that have all kinds of needs, you should let me help you identify areas that fit your needs.

Step 4: Visit Your Top Local Areas
Next, plan a driving trip and visit your top neighborhoods. If education and recreation is important, drive by the schools and parks. If entertainment is a priority, walk the downtown. Previous clients asked me to prepare tours for them. Just let me know and I will prepare driving / walking tours for you.

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Although figuring out what you can spend is straightforward (simply talk with a great lender), figuring out what you can afford requires a close examination of your personal needs and finances. For example, while you may be approved for a monthly payment of $6000 given your income, you may be comfortable only paying $4000 given your lifestyle needs, stress tolerance and investing style. So look at your income and expenses, then ask yourself what monthly payment you are comfortable paying. Some additional questions:

• Do I have assistance for the down payment? (e.g., government aid, family assistance or equity sharing)
• How much down payment can I make?
• What is my budget for purchasing and maintaining a home?

Ultimately you must talk with a great lender to figure most of these variables out. If you need a recommendation, just let me know.

Basic Terms
Before you call, familiarize yourself with the following:

• Debt/income ratio: The sum of monthly debt obligations (including the prospective mortgage) to monthly gross income. Most lenders look for a debt-to-income ration of 36% or less.
• Housing expense/income ratio: The sum of monthly housing expenses to monthly gross income. Most lenders look for a house expense/income ratio of 28% or less.
• Credit Score: The most common credit score system, called FICO, assigns scores that range from 300 to 950. The higher your credit score, the lower the assumed risk that you will fail to repay the loan.

Some friendly advice
Most people are unaware of their actual credit score. Moreover it is my experience from working with past clients that the perceived credit score is much greater than the actual credit score. One client told me his score was easily over 750; it turned out it was 670. So find out your credit score and get it cleaned today!

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The beginning step in buying your first home is asking yourself the hard questions. Simply put, you must ask yourself if you are ready for the lifestyle changes that buying a home entails. When you buy a home, you take on a major financial responsibility. Housing expenses, which include mortgage payment, property taxes, hazard insurance and homeowner’s dues, range anywhere from $3,500 to $10,000 a month (or more).

Internal changes
With these additional constraints comes stress: the pressure to continue earning and the late night what-ifs. A client of mine recently spent close to $10,000 replacing her sewer lateral; when it failed, all plumbing in the house stopped. Moreover the expenses require consistent payment and planning. The mortgage payment is paid monthly, whereas the property taxes are paid bi-annually. I divide my annual property taxes by 12 and set aside that amount each month. So ask yourself, are you ready to handle the stress and disciplined enough to see the process through?

External changes
Owning a home limits your freedom (see renting discussion). There is less money to do the things you enjoy. Today I travel less because it’s unaffordable to travel. As I work more, there is less time to relax.

Ask the hard questions
Ask yourself the hard questions because the answers will tell you if you are ready. Owning a home is a big responsibility. If you are ready, go for it; otherwise wait. Before you determine if you are ready or not, I suggest you ask the following: am I ready to grow for it? The challenges of home ownership don’t change. Delaying a home purchase simply delays the sacrifice. In most if not all circumstances, the sacrifice gets more difficult with time. Find out why in next week’s article.

Growing for it
Owning a home changes your lifestyle. Will you adapt? Let me share with you the personal growth that I experienced over the last year since I bought my first home:

• I am more disciplined with my finances (trial by fire)
• I am more disciplined with my personal time
• I entertain friends at home regularly (one of my new passions)
• I hike and enjoy the outdoors more often
• I am building a community in Palo Alto

Finally, consider the intangible benefit of owning your home. For me, I absolutely love waking up in my house. It is one of my greatest joys.

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As a Realtor, it’s expected that whenever I’m asked if it’s the right time to buy, my immediate answer will be, “Of course, forget <insert good reason why not to buy>, now is the perfect time.” Unfortunately my father taught me that it’s best to understand a client’s needs and suggest appropriate actions that meet those needs. For example, let’s assume my client is a doctor who carries large student loans and plans to leave in the next two years for her fellowship. I’d suggest renting in this instance because it offers a short term commitment with fixed costs. In other words, it gives her the ability to pay down her loans and the freedom to move at anytime.

Assuming you are in a financial position to own a home, when does renting make more sense? Renting provides lack of responsibility and increased freedom. Some examples: the burden of maintenance is largely assumed by the landlord and moving is always an option (although prematurely breaking a lease agreement forfeits your security deposit). Therefore the most compelling reasons for renting, in my opinion, are the freedoms it provides from the burdens of owning a home.

In many instances, the rent payment is one-third to one-fourth the cost of the gross monthly payment for a home (loan payment, property taxes, and maintenance costs). Consequently the savings incurred (versus owning) make sense when other financial objectives are more important, such as saving for a home, paying off student loans, or supporting family members. What happens when life throws you a major curve ball? Consider the following life changes: divorce, new job, death of a spouse, and transition to a new city. Renting may provide the optimal platform for dealing with these situations.

Finally, buying a home requires years to build equity and sell at a profit. The time requirement is often between 4 to 7 years, the commitment needed to build enough equity to cover selling fees (which total around 8%) and make a return on investment.

Conclusion

Renting makes more sense when

1. You are not staying for long ( 2 years or less) or
2. Other priorities are superior to the responsibilities of home ownership

Basically you pay for predictability. The downside is that your payments build someone else’s equity (as opposed to your own).

Additional advantages of renting:

1. Amenities that are unaffordable as a buyer are accessible as a renter. Many of today’s high end apartment complexes offer pools, spas, fitness centers and recreation areas.
2. Large complexes provide a sense of community. (Unfortunately I must disagree. My memories of UCLA apartments are of filth, dilapidated buildings and sleepless nights).
3. A long lease agreement (1-2 years) provides short term stability. Despite the fluctuation of housing and oil prices, rental costs remain fixed.
4. The price of entry is small. Just 2 months rent give the right to occupy a space.
5. The option to move is always available. Whereas breaking a lease agreement prematurely may cost $5,000 (the price of the security deposit), selling at the wrong time may cost $50,000 or more (if the home is sold less than the purchase price).

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Many of us are uneducated about the benefits of homeownership. We hear on the news and from others that real estate is a good investment, yet we do not understand the basic math. Without the principles and an idea how the numbers work, its easy to postpone the decision to buy. Thankfully the math is quite simple. When you consider the financial power of owning a home, you intuitively realize that its a path you must begin sooner than later.

The Power of Appreciation
First, its important to understand the power of appreciation. Between 1972 and 2002, the US Department of Housing annd Urban Development data show that median home prices appreciated at an annual rate of 6.1% Why?

1. First, general inflation drives up the replacement cost of housing (construction material and labor) and therefore the value of real estate.
2. Second, as the population increases, so does the demand for housing.
3. The power of supply and demand is further compounded when you consider the uniqueness of our area – the Bay is highly desirable, and there is no new space to build.

Now consider the law of compounding. If a property appreciates at an annual rate of only 3% (low appreciation) for five years, then it appreciates 16% overall.

The Power of Leverage on Rate of Return
6.1 percent appreciation may not seem like a lot, but that figure is deceiving when you consider rate of return on investment verus rate of return on price. Consider the following example:

With a financing today, a mortgage gives buyers the benefit of appreciation on the full value of the home while only investing a small portion of that value. Consequently the rates of return on initial money invested are as follows:

• 30.5% with 20% down and 6.1% appreciation in one year
• 61.0% with 10% down and 6.1% appreciation in one year
• 172.3% with 20% down and 16% appreciation over five years

The Power of Deduction on Taxable Income
Tax law allows various deductions for the expenses of owning property, such as interest paid towards a mortgage and property taxes. The ramifications are significant for someone with a sizable income. Consider the impact of owning a $500,000 home on a $100,000 income:

In our example, owning a $500,000 home provides $14,525 in annual tax savings. Put the money into a high-interest savings account and use it to reduce your monthly payment by $1210 a month.

Additionally, there are many unquantifiable reasons why owning a home is a good thing. For example, it feels amazing coming home to and awaking in a home that is yours. Moreover building that sense of home is an enjoyable and satisfying experience. It takes years to imprint your personal touch through painting, remodeling, landscaping and furniture placement.

Next week we continue the series with a look at reasons why renting makes more sense.

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Mount Carmel, Redwood City, is a neighborhood I suggest to many move-up buyers because it provides charming architecture, similar to homes found in neighboring Menlo Park and San Carlos, at more affordable prices. The neighborhood boasts great weather, steadily improving schools (greatschools.net gives both North Star and Clifford top marks), tree-lined streets and ample green space through parks and nearby schools. Situated north of Jefferson and west of El Camino, the neighborhood meets many demands of the Peninsula lifestyle, including convenient commuting, easy access to shopping and the growing Redwood City downtown, and a strong sense of community.

The majority of my past buyers, who purchased real estate in Mount Carmel, did so because of the area’s charming architecture and lot sizes — 7500 square foot lots are common. Styles include Craftsmen homes from the early century, Spanish bungalows from the 20s and 30s, and ranchers from the 50s. The homes are well constructed; in fact most were built when a two-by-four was actually two by four inches. Overtime many of the original 2/1s and 3/1s were converted to 3/2s, which brings my only complaint: oddly configured home additions. In one house, the master bedroom was accessible only by way of the toilet.

Perfect for Move-Up Buyers
With the following considered, Mount Carmel is an ideal fit for buyers looking to upgrade aesthetics, home size or neighborhood.

• Affordability - Commonly Mount Carmel homes are priced 15% less than comparable ones in White Oaks of San Carlos, 20% less than comparable ones in the Willows of Menlo Park.
• Good Public Schools - John Gill (K-5), Clifford (K-8), North Star (3-8), McKinley (6-8). Start with Redwood City’s boundary map and use Great Schools for ratings, scores and reviews.
• Green Space - Stafford park on Hopkins, Dove Beeger park on Whipple, play space at John Gill and Clifford schools, sport fields at Sequoia High School and Red Morton Community Park.
• Convenient Commuting - Farm Hill gives access to 280, Whipple to 101. Caltrain is close.
• Strong Community – the summer provides many citywide events.

Suggested Drive
To get a quick sense of Mount Carmel, take Whipple west from 101. The neighborhood streets begin just west of El Camino and ascend in alphabetical order, from Arch to Birch to Clinton and so on. Start paying close attention to the homes after Duane St. Turn left on King St. At the end of the first block, you see Stafford Park, a favorite picnic spot. From here I suggest either stopping to walk the streets or continuing on to the downtown (approximately Middlefield and Broadway). For those who make the drive, please comment with your thoughts.

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